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Genius Sports Limited (NYSE:GENI) uses AI, statisticians, and technology to collect vast amounts of data on sports games as they happen. Their technology powers the in-game sports betting industry and provides the data streaming services used to augment their services.
The concept allows the leagues, teams, players, sportsbook makers, and commercial customers to engage with the fan base in a previously unavailable way.
Genius is currently loss-making, but the fixed-cost nature of its cost of sales suggests it will reach profitability within 12 months. The forecast growth in the industry implies the company is undervalued by as much as 100%.
What Do Genius Sports Do?
Genius Sports is a B2B company; they sit between the sports leagues, like the NFL, and the betting companies, like DraftKings (DKNG). They sign deals with the sports league to collect real-time data as a game is played and then sell that data to the betting companies through odds, percentages, and other metrics. Genius prepares statistics, game overlays, explanations, and predictions that commentators and screening services use to improve their programs and sports fans can use to understand better what is happening. If you have watched an NFL, NBA, or English Premier League Soccer game, then you will have already seen some of their products; the wiggly lines showing the movement of players on the pitch and the path of the ball are all generated by Genius.
Genius uses AI, statisticians, and technology to collect vast data on sports games as they happen. The data collected becomes the product and the competitive moat around their business.
Genius provides the infrastructure to collect, analyze, and distribute the data. Teams and coaches use the data to analyze player performance, streaming services, and fan sites to improve fan base engagement, and marketing companies use it to target customers. But most of all, they are the engine that enables in-game sports betting. 97% of all the US sportsbook companies are Genius customers (FY 2022)
Customers
The Sportsbook providers effectively outsource resource-heavy tasks for collecting data and calculating betting odds in real-time while a game is progressing.
Sports Broadcasters and streaming sites receive overlays and official tracking data to supplement feeds and enhance commentary.
Commercial brands can access marketing and fan engagement tools that drive specific marketing and customer acquisition.
The concept allows the leagues, teams, players, sportsbook makers, and commercial customers to engage with the fan base in a previously unavailable way. Genius improves the viewing experience for the fans, increases their knowledge, and gets them more engaged.
In-game Betting
The UK is probably the most mature and regulated sports betting region, and sports betting companies report that most of their revenue is generated by in-game bets. In-game betting is a growing market in many areas, especially the US, where in-game betting has grown from 4% to over 80% (see later discussion of BetVision)
SportsBetting is a growth industry and may drive the demand for Genius services for years.
The Business plan
Genius tries to sign exclusive deals with the sports league to collect in-game data and provide it to the betting companies. Genius Sports technology is embedded into the league; they use it to provide data for the commentators to use (so and so has hit 40% of throws longer than 30 yards, etc) and on-screen overlay graphics showing the action. They can also provide real-time percentage conversion rates for each play.
Genius claims (FY 2022) to be the global leader in official data rights; this means data sanctioned by the sports rights holder (usually the league or federation). The data is used to update real-time odds and settle bets accurately and promptly. Official data is an important concept; as this market matures, sportsbook companies must access it to ensure they use the correct odds. Otherwise, intelligent bettors will take advantage when they misprice.
Mispriced odds turned me into a contrarian investor and led to my current life as an independent analyst and trader. In the early 90s, I worked in the financial district of London (I was involved with portfolio analysis and pricing of debt instruments). At the time, City Index offered in-game betting on Cricket whenever the English team was playing; the odds were based solely on bets received and were calculated by individuals with pen and paper. London City trader’s bets were overwhelmingly in favor of England. I just used to wait until the odds had built up beyond a reasonable level and then bet against England, opening and closing the bet in-game.
Thanks to companies like Genius, the opportunity to do that in sports is now much diminished.
Can Genius make money?
The sportsbook companies are guaranteed to make money if they set the odds correctly and people pay their dues. The spread will ensure they are profitable. It is not the same for Genius as they are not involved in taking the bets; they only provide the data. In Q3 2023, the CEO said that Genius received a revenue share of 5%-6% for in-game betting and 1% or 2% for pre-match betting from the Sportsbook companies.
Genius has several significant costs. They need multiple cameras at every game to collect the data and employ 7,000 statisticians. They perform their AI data analysis operations through Amazon Web Services and must pay for high-speed, low-latency computing power and copious amounts of storage.
Major worldwide leagues receive a fee to get the rights to the data. Smaller regional leagues are compensated on a pro rata deal against the equipment needed.
Genius must cover these and general business overhead costs by selling access to their data.
This diagram from SimplyWall.st gives an overview of the Genius operations as they stand at present it is based on a trailing 12-month basis.
Money Flow (SImplywall.st)
The diagram shows how Genius earns and spends its money. With a Gross profit of $62 million and expenses of $236 million, Genius is clearly a loss-making operation.
The ability of Genius management to turn this situation around in short order is the basis of my bullish call.
In the Q3 earnings call, full-year revenue guidance was raised for the third time this year, and EBITDA growth of over 200% was forecasted. Quarterly revenue of $102 million was up 29% yearly, and EBITDA was up 250% for the same period. Operating expenses were lower on GAAP measurements despite the revenue growth.
Genius is guiding to long-term EBITDA margins of over 30%, and we can have some confidence in this figure as the most prominent league customers they have (NFL and EPL) have recently renewed. Over 70% of revenue is outside the US and is substantially driven by income from coverage of the English Premier League, the world’s most popular soccer league.
The cost of sales will be the key driver of future profit. It is a near-fixed cost, hence the fall in costs this year when revenue increased. 70% of the company’s operating expenses are almost fixed, growing slower than revenue (FY2022). If the sportsbook companies increase their revenues, then Genius increases its revenue but not its costs.
Genius has 9 Wall Street analysts covering it, and they forecast 2025 Revenue of $550 million with earnings of $12 million. That is a significant turnaround in 2 years, and using these figures, a fair value of Genius would be 125% above its current value.
DCF Fair value (Simplywall.st)
The average analyst price target for Genius is $9.14. Analysts are consistent in their optimism.
Analyst cover (Seeking Alpha)
Genius is immune to competition in the sportsbook market; if DraftKings loses market share of the NFL to a newcomer or a competitor’s special deal, Genius, as the exclusive supplier of the data, is unaffected. It benefits from competition, which inevitably involves marketing and drives increased user engagement.
The competition in the sports betting market allows Genius to upsell more of its products. It offers live streaming services so players can watch the game and place bets on the device with overlays and clearly shown odds.
I track and trade in disruptive technology and have umbrella terms for the disruption; Genius comes under my Digital Consumer market sector. The basics of this are that consumers will spend more and more of their disposable income online; we are now used to seeing people buy online Amazon and watch their movies online via Netflix. My thesis is that people will become immersed in online entertainment when the boundaries between entertainment, gaming, gambling, and sports blur into one interactive experience. Genius is in the online gambling subsector of the digital consumer marketplace a fast-growing and profitable market.
A few large players dominate Online Sportsbetting; Flutter (OTCPK:PDYPY), MGM Resorts (MGM), and DraftKings (DKNG) have the majority of the market share with PENN Entertainment (PENN) trying to muscle in with its ESPNBets following Flutters SKYBets business model that has been extremely successful in the UK.
Genius has a growing product range.
Genius is part of a new disruptive industry; they are embedding their technology into the fabric of the sports leagues, becoming the custodians of the sports data. In this fast-moving world, they are developing a competitive advantage by providing a sticky product that is hard to move away from and being a business partner companies choose to do business with.
Having signed exclusive deals for the data, Genius is developing ways to monetize the data it collects further and increase the amount of data it collects.
Second Spectrum
Acquired in 2021 (FY 2021 Page F20, business combinations), Second Spectrum provides optical tracking using computer vision and AI to generate performance data, analytics, and visualizations for sports broadcasters; if you are an NFL fan, you will be used to seeing this as lines on the field tracking the movement of players and the ball to explain a play. This service is being expanded to other leagues and sports, increasing the stickiness of the company’s products in those leagues. Even minor leagues can now offer fully streamed games with insightful analytics without the cost or need for a whole TV production crew.
Fan Hub and Spirable
These two companies, also acquired in 2021 (FY2022 P58 investing Activities and P25 History), increase the ability of Genius and, hence, its customers to engage with the fanbase of each sport. It allows for greater data collection, augmented by free games like fantasy leagues, trivia, and contests that can be used by the relevant sports leagues, media companies, and sportsbooks to engage with the fanbase. Media companies use the Genius ad tech business to reach sports fans with real-time adverts while the game is going on and sportsbook companies to provide real-time odds and discounts.
BetVision
BetVision launched last quarter with the NFL. It is a streaming service that integrates all of Genius’s technology, live betting markets, augmented computer vision, and statistics. A viewer can control the entire experience, giving a fully integrated Sports, data, and betting experience. The CEO reported that for Betvision streamers, 83% of dollar volume bets were performed in-game (4 times the normal figure), significantly increasing Genius revenues.
This is a list taken from FY 2022 and shows the quality of the Genius customer base.
Genius Partners (GENI FY2022)
Competition
Apart from some smaller players, this industry is a duopoly, with Genius and Sportradar (SRAD) being the dominant forces. They had to settle a divisive court case over Premier League data and have driven up the cost of securing the rights to US sports leagues when Genius outbid Sportsradar to get the NFL in 2021. The following year, Sportradar outbid Genius to secure the NBA on a long-term contract.
Sports leagues (Analyst from company websites)
The key competitive differentiators between the two are the ease of technology integration, their exclusive rights to data, and the relationships with sportsbook providers.
Genius’s two large exclusive leagues, the NFL and the English Premier League, have recently renewed long-term contracts. They are probably the two biggest prizes in sports bookmaking. SRAD has the NHL and the new deal with the NBA in the US and does have the majority of world cricket leagues signed up. The short form of cricket 20-20 has a huge following in the big betting markets of Asia, so it will generate significant revenue.
The competition between these two when they bid against each other hurts their profits, making it more difficult to turn a profit and ensuring that significant amounts of future income will be needed to tie in these deals.
Key data points (Author)
SRAD has a market cap almost three times that of Genius and covers nearly four times as many events each year, but it has only 39% more partners. SRAD appears close to fair value (Simplywall.st DCF valuation), and Wallstreet analysts see a 29% upside. Genius appears significantly undervalued and has a much higher price target.
The other risk to this bullish thesis is regulation. The European markets are mature and well-established. It is unlikely that a significant change will happen in these areas. The English Premier League is a worldwide phenomenon that is widespread throughout Asia and Europe.
The US situation is not as clear-cut; now, more states have confirmed that they will allow online sports betting, but it is not universally liked and will be somewhat contentious for some time. However, I do not expect any meaningful negative impacts from regulation on my two-year time horizon. US politics seems to have so many contentious issues that this one has slipped down the pecking order, so it may be allowed to continue with little scrutiny.
Conclusion
Genius is an example of data and AI providing a company with a competitive advantage and a moat. They operate as a middleman between the biggest sports in the world, the betting companies, and sports fans. They make money by selling the analysis of the data they collect on games and the fans, selling it to sportsbook companies and other commercial companies not involved in sports betting.
Genius provides official data to leagues and teams. The data they collect keeps expanding and will soon encompass player safety as it tracks head collisions and heart rates. The AI works out betting odds and advises on player performance, helping coaches improve their teams and increase engagement with fans.
The Fanhubs powered by Genius data will be able to discuss players and tactics with new information and insights, improving the engagement with their team and the league.
I rate Genius a clear buy and expect them to move swiftly to a profitable company. They exist in a duopoly, and I will cover the other half of that duopoly in my next article, concentrating on the difference between the two companies.