Rolling the Dice
In the end, The House Always Wins.
Some quality stocks take full advantage of this.
The next company we’ll buy for the Portfolio has a Total Quality Score of 8.8/10. This is the highest score so far!
As a result, this Owner-Operator Stock will also get the highest weight within the Portfolio.
Rolling the Dice
The fourth stock we’ll buy is a market leader in developing fully integrated B2B Online Casino solutions. The core of their offering are traditional table games like Roulette, Blackjack, and Baccarat (Baccarat is typically played in Asia). It’s important to highlight that the company isn’t a casino operator. They create online casino games and casino operators that use their games pay a commission of 10-12% on their winnings.
The company was founded in 2006 and all three founders are still involved within the business. Two of the three founders still own 10.4% and in total, insiders own 12.1%. The company’s Chief Product Officer has been referred to as ‘the Steve Jobs of Gambling’.
The European company can be seen as a market leader in a niche market. They have a sustainable competitive advantage benefiting from economies of scale, network effects, a wide variety of games, switching costs, and regulatory expertise. In general, it’s very hard for casino operators to develop games in-house.
The online gambling market is in a clear secular trend. The consensus states that this market should grow at a CAGR of 12% until 2030. Research indicates that the company we’ll buy has an implied market share of 70% (!).
It’s important to highlight that more regulation can be seen as a positive as the company has a lot of regulatory experience and the fact that the cost of implementation is very high. This is a disadvantage for smaller peers.
The company has had a Net Cash Position every single year since 2012 and has a low capital intensity (Maintenance CAPEX/Sales: 4.0%). Furthermore, they are a great capital allocator as its ROIC and ROE averaged 48.6% and 45.0% respectively over the past 5 years. Since 2017, their Dividend Per Share increased from € 0.07 to € 1.97 per share.
The profit margin of this Owner-Operator Quality Stock has averaged 48.0% (!) over the past 5 years and they translate most earnings into free cash flow. Since 2012, the company has grown its revenue from € 31.3 million to € 1,656.7 million, a CAGR of roughly 50%. It is expected that the company will be able to grow its revenue and EPS by roughly 20% per year over the next 3 years.
Currently, the company trades at a FCF Yield of 5.7%. This is the cheapest valuation level they have ever traded at since their IPO.
Our Reverse DCF indicates that the company should grow its FCF by 5.5% per year over the next decade to return 10% per year to shareholders. These numbers look very conservative to Compounding Quality as the online gambling market as a whole should be able to grow by 12% per year until 2030.
Since its IPO in 2015, the stock compounded at 55.3% (!) per year. The company’s owner’s earnings (EPS Growth + Dividend Yield) grew at 63.8% per year over the past 10 years.
It’s quite funny to see that the evolution of the S&P 500 looks like a flat line in the chart above. That’s the beautiful thing about letting your winners run.
“If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you're patient.” – Peter Lynch
Q3 Results
Earlier this week, the company we’ll buy on Monday published its Q3 2023 results. The results were great but the stock declined 6% on the report.
The main reasons?
The company sees higher demand for its product than it can currently deliver
The strengthening of the Euro against most currencies has affected their top-line growth negatively. In Q3, there was a 6-8% negative headwind on revenue growth from currency effects.
The market/analysts are punishing the company for this. And this while the company grew its revenue and EPS with 26.1% and 26.8% over the first 9 months of 2023!
We aren’t as pessimistic as short-term minded analysts. Why?
Higher demand than they can deliver: management dares to admit its mistakes and communicates in an honest and integer way (studios weren't expanded fast enough) AND the end market is still growing very attractively. This will drive revenue and EPS growth for the company in the years to come
Negative FX effects: this is just a temporary effect. It isn't a structural issue. The company should focus on what they CAN control and that’s exactly what they do
EPS is estimated to be equal to €5.51 in 2024. This would mean that the company trades at 15.1x earnings based on expected 2024 results. That’s very cheap for a company that should be able to grow its revenue and EPS by roughly 20% in the years to come (PEG < 1x).
That’s why we see the declining stock price as a result of the ‘bad’ Q3 results as an extra positive. The lower the price we need to pay for an Owner-Operator Quality Stock, the better.
While Wall Street likes to think in quarters, Compounding Quality likes to think in quarter decades.
Now let’s tell you which company we are talking about, prepare our transaction for Monday, and share the full investment case of 40 (!) pages with you.