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Rush Street Interactive (RSI)

Place a Bet on the New World of Online Gambling

Sports betting is already a big part of Australian culture. You can’t watch a game these days without being bombarded with adverts at every break encouraging you to hop online and wager on the outcome.

Our US compatriots are catching up with our love affair with gambling on sports and their industry has some interesting players.

Surely you have to be better off owning the betting company than gambling your investment money on the kick of a ball?

We introduced you to DraftKings (DKNG) last November and we still think that is a buy now.

Executives at DraftKings (DKNG) announced on Tuesday a $20 billion offer for Entain, a British sports betting giant. The oddity is Entain currently has a joint venture with MGM Resorts International (MGM) (another one we highlighted just recently)

It’s a gold rush. Investors should buy the companies making shovels.

Rush Street Interactive (RSI) is making software tools for the next generation of sports betting.

Demand for iGaming is surging as technological advancements and political expediency collide. For the first time, it is possible to run a sportsbook completely in the cloud. Pushing real-time gambling data to smartphones changes the gaming landscape. And revenue-hungry politicians see online sports betting as the answer to their Covid-ravaged budgets.

Sports betting is currently legal in 24 states, and New York could come online later this year. Betting legislation is pending in five more states, with more likely to be folded in during 2022 and 2023.

In Georgia. team officials from the Atlanta Braves from MLB, the NFL’s Falcons and the Hawks of the NBA have petitioned state lawmakers to legalise sports betting. Pro sport executives expect to collect billions from licensing fees.

A study from the American Gaming Association in 2018 pegged those fees at $4.9 billion, and that was before the popularity of smartphone apps.

DraftKings is vying for a piece of the growing smartphone business. It might seem like the Boston, Mass.-based company faces an uphill battle trying to beat established gambling organisations online. That’s not entirely true. The upstart has better onboarding for new users. DraftKings also has better technology.

The company acquired SB Tech in 2019 for $3.3 billion. The British software developer was known for its cutting-edge risk management and odds-making tools. DraftKings developers specialized in the types of algorithms that enabled new non-standard, in-game bets. It was a marriage made in heaven.

Entain and MGM Resorts International currently have a joint venture called BetMGM. The project is growing quickly, with 23% iGaming market share in the United States, according to David Katz, an analyst at Jefferies.

MGM made an offer in January to buy out Entain’s interest in BetMGM. That transaction is being held up by United Kingdom regulatory restrictions yet Katz argues MGM could make another bid for BetMGM in the future. Unfortunately, that transaction may leave the venture undercapitalized in terms of technology.

MGM needs a few good shovels.

Rush Street Interactive (RSI) operates an online casino and sports betting business. Its strength is the software that underpins iGaming. The nine-year old company came public in January through a special purpose acquisition company.

Shares have been on the move in September following DraftKing’s $1.6 billion acquisition of Golden Nugget Online, a similar business. Investors are speculating Rush Street will get gobbled up in the rush by bigger players to gather digital tools.

Rush Street has reported sequential quarterly from for the past seven quarters. First-quarter revenue grew to $112 million, up 218% year-over-year. And the business is only getting started.

The company currently operates in 11 states. It launched a sportsbook during 2021 in Michigan, Virginia and Iowa. Monthly active users grew to 115,000, up 166% from a year ago. And average revenues per user grew 21%, to $302.

Big players are furiously trying to stake their digital claims for the future of gaming. DraftKings going after Entain is part of this process.

Rush Street is a logical target for a bigger player yet the core business is strong enough to stand on its own.

We suggest longer-term investors use any weakness in RSI to pick up an allocation to gain exposure to this growing industry.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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