GAN Limited: Our Favorite Internet Gambling And Sports Betting Stock (NASDAQ:GAN)

GAN Ltd (GAN) offers technology solutions and a white-label platform for online casino and sports betting applications. The company’s software-as-a-service is used by major casino operators to capture strong market growth driven by a trend of legalization at the U.S. state level along with the rise of mobile gaming applications. GAN launched its IPO earlier this year and while the COVID-19 pandemic represented a disruption to the smaller sports betting side of the business, the outlook remains positive with several long-term growth opportunities. We view GAN as one of the best ways for investors to gain exposure to this important market segment through a pure-play on the technology side of the industry.


GAN Q2 Earnings Recap

GAN Ltd reported its Q2 earnings on August 20th with a GAAP EPS loss of $0.33. Revenue of $8.3 million increased 99% year over year and highlights the growth momentum of the company. Currently, the U.S. represents about 85% of the business and remains the company’s strategic focus. Excluding share-based compensation and costs related to the NASDAQ IPO reflected as administrative expenses, GAN delivered a positive adjusted EBITDA of $1.9 million reversing a loss of $226k during the period last year. GAN ended the quarter with a balance sheet cash position of $63.8 million and no long-term financial debt supporting overall strong fundamentals.

(Source: Company IR)

The story here was a record quarter for the company benefiting from dynamics surrounding the pandemic as brick-and-mortar casinos remained closed for much of the period forcing consumers to seek online alternatives. Key performance indicators for GAN are the active player-days and average revenue per daily active user “ARPDAU” which both increased by 18% and 100% each respectively.

It’s important to recognize that beyond the real money internet gaming “RMiG” operated by the casino clients of GAN, the company also offers simulated free versions of the platform which is also a revenue driver for the company. In Q2 revenues from RMiG increased by 110% y/y and represented 86% of the total. Simulated gaming revenue based on the technology licensing similarly grew by 79% y/y supported by new clients launching the service along with a surge of users.

(Source: Company IR)

For reference, some of the casino operators launch free to play versions of the GAN software games in markets where real money gaming is not yet legal or ahead of expected legalization. The process allows users to get familiar with the platform and build brand loyalty. That’s the case with Michigan which is set to allow sports and online gaming in Q4 of this year. Notably, GAN announced that it had activated simulated gaming for Penn National Gaming (PENN) during the quarter, one of the largest casino operators of the United States. GAN sees a large growth opportunity with a wave of markets expected to see easing internet gaming regulation in the coming years.

(Source: Company IR)

Management Guidance and Consensus Estimates

During the Q2 earnings release, management reiterated full-year revenue guidance between $37 million and $39 million. The pipeline of upcoming client launches along with organic user trends supports a positive near-term outlook.

According to consensus market expectations, GAN is expected to reach the full-year revenue guidance midpoint at $38 million for 2020. The market expects revenues to accelerate revenue towards a 30% growth rate per year for 2021 and 2022. The company is also forecast to reach positive EPS in 2021 that should also accelerate over the coming years given the top-line momentum.

(Source: Seeking Alpha Premium)

Analysis and Forward-Looking Commentary

What we like about GAN is its unique business model and diversified exposure to the industry across several different casino gaming partners. GAN customers like “FanDuel”, Penn National Gaming, “”, “BetFair”, and “Stations Casinos” among others using the platform highlight its leadership position. Regardless of which brand of internet gambling or sports betting gains momentum among consumers, GAN is well-positioned to benefit from the overall industry trend.

(Source: Company IR)

There is also a sense that partners are likely to maintain the existing relationship with GAN considering its best-in-class software along with the significant challenges to migrate into a different platform. The growth opportunity includes both launching into new states along with converting users from simulated to the real money ecosystem.

The company explains that its online sports betting partners currently have 20% market shares of a potential $13.6 billion business. GAN’s 4-6% revenue share implies potential revenue between $110 and $160 million as the market matures. The company also anticipates that real money gaming will surpass sports betting and become a $17 billion market at maturity. GAN’s casino partners with a 30% market share represent potential revenue for the company between $250 and $350 million. A combined forecast for GAN to eventually reach +$500 million in revenue represents a 13x increase compared to management guidance for around $37 million in sales this year.

(Source: Company IR)

In terms of valuation, GAN with the current market cap is trading at a forward price to sales multiple of 13x and 83x 2021 consensus earnings. While these multiples are objectively pricey relative to the overall stock market, we believe the premium here is justified in the context of 99% revenue growth in the last quarter and significant growth momentum over the next couple of years. GAN earnings should benefit as it leverages its existing corporate infrastructure and recent technology investments.

The other dynamic is that shares of GAN are currently down about 45% from its highs in early July. In our view, much of that downside from the high was based on speculative exuberance pulling back following the company’s IPO that maybe got ahead of itself. Still, despite the ongoing uncertainties and the headline risks, the current growth trend for GAN is among the strongest in the market in any sector.


Overall, we rate shares of GAN as a buy and consider the current weakness amid the stock market volatility as a buying opportunity. Compared to a peak market cap of $800 million back in July, our more modest price target for the stock at $21.00 for the next year represents a market cap of $605 million and a forward p/s multiple of approximately 12x based on 2021 consensus revenues.

The main risks here are related to the regulatory environment and any potential setback to the timetable of expected real money gaming launches at the state level could force a reassessment of the growth outlook and earnings potential. While the company proved to be resilient coming out of the pandemic, ongoing uncertainties regarding the strength of the economic recovery could also pressure GAN’s results. KPI metrics like the ARPDAU, along with financials such as the adjusted EBITDA margin, are key monitoring points for investors.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GAN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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