Gambling.com Group Deep Dive & Valuation. ($GAMB)
Gambling.com Group is a performance marketing company specializing in the online gambling market, well-positioned to benefit from the ongoing regulation and legalization of online gambling.
Gambling.com Group Ltd. is a performance marketing company specializing in digital marketing services for the online gambling industry including online casino, online sports betting, and fantasy sports. Gambling.com Group operates a portfolio of branded websites, including Gambling.com, Bookies.com, Casinos.com, and RotoWire.com, along with over 50 local websites tailored to various user interests and markets. These websites produce original content such as news, odds, statistics, product reviews, and comparisons of online gambling services. Utilizing their proprietary platform, websites, and media partnerships, Gambling.com Group attracts online gamblers through targeted marketing efforts and refers them to licensed online gambling operators, with the intent of converting users into paying players.
Gambling.com Group Ltd was founded in 2006 by Charles Gillespie, its current CEO, and joined by Kevin McCrystle, the COO, in 2007. Initially operating as World Sports Network (WSN), the company provided sports content to East Asian soccer fans. In 2009, it rebranded to KAX Media and shifted its focus to online casino content for Western Europe, acquiring the Gambling.com domain in 2011. Between 2012 and 2017, the company expanded its market presence launching websites in the UK, Ireland, Italy, Spain, and Scandinavian markets. They also launched SlotSource.co.uk and made significant acquisitions in the UK and Europe including the expansion of the Gambling.com domain. In 2017, the company rebranded to Gambling.com Group. In 2018, it entered the US market, securing a license in New Jersey and expanding with the acquisition of a mobile performance marketing platform, several iOS apps, and other sports betting assets, including Bookies.com. The company continued its growth trajectory with additional market entries, acquisitions, and the launch of SlotSource.com for American players. In 2021, the company relocated its corporate domicile from Malta to Jersey, completed its initial public offering on the Nasdaq under the ticker symbol GAMB, and expanded operations across multiple US states. Gambling.com Group has gone on to expand its North American foothold with acquisitions such as RotoWire.com, BonusFinder.com, and Casinos.com.
As of June 2024, Gambling.com Group operates more than 50 websites across 17 national markets and in 11 languages. Major markets include North America, Europe, and Latin America, particularly Mexico and Brazil. North America and Europe are the company’s largest markets, offering the clearest growth opportunities. As of May 2024, 30 states in the United States allow online sports betting in some form, and 7 states permit both online sports betting and online casinos. Gambling.com Group is authorized to operate in 22 of these states. The company operates out of offices in Dublin, Ireland; Saint Julians, Malta; Madison, Wisconsin; Tampa, Florida; and Charlotte, North Carolina, which serves as their North American headquarters. The company employs approximately 500 people and has earned several awards including 2023 SBC North America Sports Affiliate of the Year Award, the 2023 eGR Global Nordics Affiliate of the Year, the Best Sportsbook Affiliate at the SiGMA Affiliates B2C Awards, and more.
The Business and Operations
Contrary to popular belief, Gambling.com Group is not a gambling company and does not offer real money gambling-related services. Instead, the company provides B2B digital marketing services to online gambling operators such as FanDuel, DraftKings, and BetMGM to name a few. Gambling.com Group generates the majority of its revenue through a performance marketing model, earning commissions or fees by referring new depositing customers (NDCs) to online casinos and sportsbooks, essentially serving as an affiliate. Here's how it works:
Using its proprietary platform, Gambling.com Group manages its portfolio of branded websites including Gambling.com, Bookies.com, Casinos.com, Freebets.com, RotoWire.com, and over 50 local websites. Each website is tailored to the user interests and the market it operates within. These websites typically feature original content including news, odds, statistics, promotions, app rankings, online casino and sportsbook comparisons, and more. Through online marketing efforts such as search engine optimization (SEO) and content marketing, and media partnerships, Gambling.com attracts prospective online gamblers to these sites where they can then be referred to various online gambling operators. When users register and deposit funds with these operators, Gambling.com Group earns revenue pursuant to their agreement with the online gambling operator. At this point the user becomes known as a “referred player”. It is common for online gamblers to register with multiple gambling operators. New registrations are often driven by promotional offers, such as risk-free bets or deposit matching (terms and conditions apply, see offer for details…). These incentives attract users looking to maximize their benefits and explore different platforms.
Gambling.com Groups’s revenue fall under three different models. The company typically negotiates with gambling operators for the most revenue optimal model, which may vary depending on the details of the commercial offer, product, market, traffic type and operator. The revenue models are as follows:
Cost Per Acquisition (CPA): Model where an online gambling affiliate receives a single cash payment for each referred player that satisfies certain agreed upon criteria. CPA is the companies most commonly used model making up 58% and 59% of performance marketing revenues or $50.94 million and $36.05 million in 2023 and 2022 respectively.
Revenue Share: Model where an online gambling affiliate is compensated with a percentage of the net gaming revenue (NGR) produced by a pool of referred players. NGR is the total revenue generated by referred players after deducting certain costs. It includes gross bets placed by players minus winnings paid out, bonuses granted, chargebacks, and any applicable taxes or fees. Gambling.com is then paid a percentage of this net amount. The revenue share model is the lesser used of the models consisting of 13% and 14% of performance marketing revenues or $11.42 million and $8.55 million in 2023 and 2022 respectively.
Hybrid: Model where an online gambling affiliate receives a combination of revenue share and CPA per referred player. The hybrid model is the second most common model used consisting of 29% and 27% of performance marketing revenues or $26.26 million and $16.2 million in 2023 and 2022 respectively.
Gambling.com Group generates additional revenue through subscription services, content syndication, and advertising on their websites. Following the 2022 acquisition of Roto Sports, the company has expanded its revenue streams to include business-to-consumer (B2C) fantasy sports data subscriptions and business-to-business (B2B) data syndication and content sales. Additionally, Gambling.com has monetized its websites by selling advertising slots and charging onboarding fees for integrating new clients onto their platforms. Over the past few years, advertising and other related revenues have accounted for approximately 12% of total revenues, while subscription and content syndication revenues have made up around 7%. The largest portion of their revenue, about 81%, comes from performance marketing.
Since Gambling.com Group primarily generates revenue through a performance-based model, it is crucial for the company to deliver not only a high volume of traffic but also high-quality traffic to its gambling operator partners. To achieve this, the company utilizes several strategies including SEO, content marketing, and by entering strategic media partnerships. SEO is essential for ranking in search engines like Google and Bing when users search for information. While Gambling.com Group does not disclose its specific strategies, we can assume they follow SEO best practices such as on-page keyword placement, optimized site speed and mobile-friendliness, internal linking, meta descriptions, optimized on-page content, and backlinks. For a better understanding of some of the SEO tactics that goes into the online gambling and casino industry, check out the following videos: Video 1, Video 2.
Content marketing is a strategy used to attract, engage, and retain an audience by creating and sharing relevant articles, videos, podcasts, social media posts, and other media. Gambling.com Group leverages content marketing by producing articles, guides, reviews, news, blog posts, and more, tailored to attract, engage, and inform both current and prospective gamblers. This content is distributed through email marketing newsletters, social media, videos, and content partnerships, most of which link to Gambling.com Group’s affiliate sites. The company uses a data-driven approach to track content performance and refine strategies. Additionally, they focus on providing a positive user experience with high-quality, easy-to-navigate content and often collaborate with industry experts or feature guest contributions. Content marketing works in tandem with SEO by generating backlinks and building authority and trust with search engines, allowing Gambling.com Group and their affiliate sites to rank higher. A search of LinkedIn and Gambling.com Group’s career page leads me to believe that much of their SEO and content marketing is done in house with positions such as content editor, SEO specialist, lead developer, digital PR, content associate, sports journalists, writers, and more.
Media partnerships have become a pillar of Gambling.com Group's growth strategy, enhancing their reach, credibility, and overall marketing effectiveness. These arrangements have historically been mutually beneficial and relatively low in risk. By combining publishing and monetization systems with the website authority of leading media brands, Gambling.com Group can generate incremental revenue from these websites. These partnerships provide access to a broader audience, a greater diversity of content formats, enhanced credibility for both Gambling.com Group and their gambling operator customers, SEO benefits, and opportunities for content collaboration and guest contributions. In return, media partners benefit from increased traffic to their sites, higher engagement, a revenue share, and access to high-quality content, which they can monetize for their benefit. In recent years, Gambling.com Group has pivoted to focus on fewer but bigger media partners whose digital media properties can be leveraged at the greatest scale. Some examples of media partnerships include Gannett, the largest media publisher in the U.S. with a presence in 43 states and operation of major names such as USA Today, The Detroit Free Press, AZCentral, and the U.K. based Newsquest. The Independent, another U.K. Based media publisher with over 20.8 million monthly users. And McClatchy Company, a large U.S. based publisher operating in 29 regional markets, with names such as The Miami Herald, The Sacramento Bee, and The Kansas City Star. I would argue that these media partnerships provide a competitive advantage for Gambling.com Group by allowing the company to quickly gain authority and traction in newly legalized and active markets where these media partners already have a strong presence. This can be seen as a form of first-mover advantage, as the established reach and credibility of partners like Gannett, Newsquest, The Independent, and McClatchy help Gambling.com Group effectively disseminate its content to a broad and engaged audience, accelerating its market entry and growth.
Gambling.com Group attracts, negotiates, and develops relationships with gambling operators through a standard inside sales process of direct emails, calls, and referrals from existing customers. Additionally, outside sales efforts are made through attendance at industry conferences and in-person meetings. Gambling operators often discover Gambling.com through its affiliate websites and submit advertising proposals via a contact form. While attracting new customers is important, Gambling.com primarily focuses on maintaining and deepening relationships with existing customers by increasing traffic and new depositing customers (NDCs).
The account management team at Gambling.com is responsible for these relationships, coordinating day-to-day interactions and communications with customers, as well as improving the commercial aspects of deals. Meanwhile, the product and content teams concentrate on optimizing the content, offers, news, and other details related to customers' brands and their presentation to online gamblers. All teams work towards the common goal of maximizing conversions for both the customers and Gambling.com. Furthermore, Gambling.com often negotiates exclusive offers and bonuses with gambling operators that are only available on their websites, enhancing the appeal of their offerings.
The Online Sports Betting and Casino Industry
Although Gambling.com Group is a performance marketing company rather than a sports betting and casino operator, its revenue is closely tied to the online gambling industry. As stated in the 2024 Annual Report, "The main drivers for the online gambling affiliate market in which we operate are the underlying online gambling market, the pace and detail of regulation, the amount of spend on customer acquisition by the online gambling operators, and the share of such spend going to online gambling affiliates such as us. Underlying market growth stems from both an increase in the number of jurisdictions regulating online gambling for the first time, as well as growth from already regulated jurisdictions where online gambling is becoming an increasingly accepted, mainstream leisure activity." Consequently, much of my industry analysis will focus on the general online sports betting and casino industry that Gambling.com Group serves.
According to research by H2 Gambling Capital, a gambling industry market research and consulting company, the global online gambling industry is expected to grow at a compound annual growth rate (CAGR) of 12% through 2028 in terms of gross gambling revenue (GGR). The U.S. online gambling industry is projected to grow even more rapidly, with an expected CAGR of 28% through 2028. Other market research reports such as Grand View Research, Mordor Intelligence, and Custom Market Insights have more conservative estimates.
One of the major drivers for this growth is increased regulation and legalization of online sports betting and casino markets, both in the U.S. and globally. In the U.S., 21 states still lack a regulatory framework for online sports betting, and 43 states have yet to regulate online casinos. While not every state is expected to legalize online gambling, it is anticipated that many more will do so in the next five years, driven by the desire to increase state revenues and reduce black market gambling. Additionally, Europe remains a promising growth market for online gambling, with continued expansion and regulatory developments. Opportunities are also emerging in some South American markets and Japan, who are beginning to regulate online gambling activities. Increased customer interest in online gambling has driven organic growth, further facilitated by the widespread use of mobile devices and high-speed internet. The convenience and accessibility of mobile betting apps and online casinos have made it easier than ever to interact with online gambling markets. Gambling affiliates are expected to share in this growth.
The online gambling industry is a highly regulated environment. Gambling operators face various challenges that differ by jurisdiction, including complex licensing requirements, tax variations, compliance costs, responsible gaming mandates, and advertising restrictions. Although Gambling.com Group is not directly impacted by many of these challenges, their ability to understand and navigate the regulatory environment enables them to better support their customers in expanding their markets and maintaining compliance, particularly in marketing efforts.
Marketing companies serving the online gambling space industry are subject to their own set of regulations. These include the necessity to incorporate responsible gambling messages, avoid misleading information in advertisements, and adhere to strict age and audience targeting to prevent exposure to minors and vulnerable populations. Additionally, they must comply with platform-specific policies on social media and search engines. Marketing companies must also navigate varying country-specific and state-specific regulations, clearly disclose terms and conditions for promotions, and maintain transparency about affiliate relationships.
For companies like Gambling.com Group, these restrictions ensure that their marketing practices are responsible, compliant, and effective in promoting their operator customers' services within different regulatory frameworks. In the U.S., any company that provides services to a regulated gambling operator is typically required to register or apply for a license or approval with the respective state’s gambling regulators. Consequently, Gambling.com Group has obtained several of these licenses to operate. In European markets, Gambling.com Group generally does not require licensing as it operates under a pure B2B business model, with exceptions in Romania and Greece. Operating within the regulatory frameworks of each jurisdiction without scrutiny is crucial not only to the reputation of Gambling.com Group but also to its customers.
For the latest information on the legalization and legislation of online sports betting, the American Gaming Association's website offers an interactive map where user can toggle for state by state overview. Similarly, Casinos.com provides an interactive map for tracking the status of online casino legalization. The Legal Betting Online site is another great option.
Competition and Competitive Advantages
The online gambling affiliate market is a competitive and fragmented industry characterized by low barriers to entry and low switching costs among affiliates. It is continually evolving with new market entrants, technological advancements, and dynamic marketing strategies. Players within the space generally compete on the basis of website quality, strategic presence, customer base, technology, and overall reputation. Major competitors to Gambling.com Group include: Better Collective (OM:BETCO), Catena Media (OM:CTM), Raketech Group (OM-RAKE), XLMedia (AIM-XLM), Sportradar AG (SRAD), Genius Sports Ltd. (GENI), NeoGames S.A., and Inspired Entertainment (INSE).
Gambling.com Group ranks strong against its competitors. Although smaller compared to companies like Better Collective and Catena Media, Gambling.com Group has consistently outperformed in new state launches and gained market share. The company boasts some of the best-in-class returns on investment and margins within the gambling affiliate space. Historically, Gambling.com Group has focused more on Cost Per Acquisition (CPA) and hybrid revenue models compared to the revenue share model used by most of their competitors. This approach has reduced the level of performance risk the company assumes in relation to gambling operators. Additionally, Gambling.com Group has a much leaner balance sheet compared to its peers, making them better positioned for acquisitions with favorable financing terms.
I believe that much of Gambling.com Groups outperformance the past few years can be attributed to the company’s competitive advantages in areas of technology, strategic partnerships, and overall brand strength. Let’s dig into these more:
Technology Advantages: I find myself increasingly cautious when a company touts proprietary technology as a competitive advantage, but in this case, I genuinely believe Gambling.com Groups tech stack is a major contributor to their operational efficiency. The company has four internally built cloud based, proprietary software platforms. This includes: 1) Adge, a business intelligence software that integrates data from their websites and advertising partners to further optimize offerings and drive NDC’s. 2) Origins, a high-speed publishing platform that distributes content to all the company’s sites globally and ensures quality execution of SEO strategies. 3) Genesis, a content management and repository system critical to the customization and launch of current and new sites. And lastly, 4). Elements, an advertising server that assists in managing the timing and appearance of ads and offers across the company’s network of websites. Together, these platforms enable significant efficiency through automation and scalability, allowing Gambling.com Group to quickly adapt to new gambling operators, websites, and market entries. They also provide quality customer facing experience with their speed and personalization.
Strategic Partnerships: Gambling.com Group’s strategic partnership have been two-fold. The company has partnered with some of the largest gambling operators globally, but more notable have been its media partnerships. The company has partnered with the two largest print and digital media companies in the United States: Gannett and McClatchy. According to CEO Charles Gillespie in a recent earning call, “It is noteworthy that these two very large news organizations chose Gambling.com Group among all our peers to monetize the immense opportunity in U.S. sports betting available to them.” These media partnerships increase Gambling.com Groups reach and SEO authority while generating incremental revenue. As I mentioned earlier, I believe that these media partnerships also provide Gambling.com Group a first mover advantages in newly legalized markets where these media partners already have a strong presence. Although media partnerships are not uncommon for gambling affiliates, Gambling.com Group certainly boasts some of the most prominent names in the business. These partnerships have been particularly beneficial in the mature sports betting market. However, I do not expect them to be as valuable to the fairly young casino market.
Brand Strength: Gambling.com Group has established a solid reputation in the gambling affiliate space. They have been chosen over their peers for key media partnerships and have earned several "Affiliate of the Year" awards, as well as accolades for their high-quality content. These achievements make Gambling.com Group a preferred partner for gambling operators seeking a dependable and effective affiliate. As both the sports betting and online casino markets continue to grow, gambling operators will increasingly seek partners who can drive NDCs. Gambling.com Group's strong brand, proven track record, and industry recognition position them as a top choice for operators looking to expand their market presence and achieve their growth objectives.
Management
Gambling.com Group is a founder-led company with Charles Gillespie and Kevin McCrystle holding executive positions as CEO and COO, respectively. Charles Gillespie owns an estimated 13.6% of the total shares outstanding, while Kevin McCrystle owns an estimated 3.5%, demonstrating significant personal investment in the company's success. Elias Mark, who has been with the company since 2016, serves as the CFO. The executive team also includes a Senior Vice President of People and a North American Executive Vice President. In my assessment, the management team operates with an owner’s mindset, focusing on providing long-term value to shareholders.
The board of directors consists of seven members, with Charles Gillespie serving as Chairman and Kevin McCrystle as a director. The board includes individuals with extensive experience in technology, sports betting, online gaming, and media. Mark Quartieri, the lead independent director who joined the board in 2024, owns an estimated 25.6% of the shares outstanding. Overall, executive officers and directors collectively own approximately 45.6% of the shares.
Due to Gambling.com Group's status as a foreign private issuer, it is not required to disclose executive compensation information on an individual basis. However, it has been reported that the total compensation for executive directors and officers, which includes share-based compensation and other payments, amounted to $6.3 million in 2023 and $5.7 million in 2022.
Risks
Gambling.com Group is subject to several risks in the course of their business. I’ll highlight some of the more unique and most notable below.
Changes to SEO algorithms: Gambling.com Group relies significantly on search engines like Google to drive organic traffic to their sites. Updates to these search engines' algorithms can impact the ranking of the company’s websites. Historically, while these updates may result in temporary negative impacts on revenue, Gambling.com Group has successfully recalibrated its strategies and recovered stronger each time. However, a recent May update to Google's algorithm, which targeted "spam content", site reputation abuse, and the use of third-party affiliate links, has significantly affected the industry. This update is expected to take some time to fully adapt to, as companies re-evaluate their partnerships and affiliate practices to align with the new guidelines. Additionally, the Google update may allow smaller affiliate companies to more effectively compete with larger ones like Better Collective, Catena Media, and Gambling.com Group who have historically benefited from their larger capital base.
Changes in technology: Technological advancements in platforms used by gambling operators, media partners, and online gamblers can impact Gambling.com Group’s ability to effectively target their content and services. The company’s ability to efficiently reach online gamblers is critical to their revenue streams and the value they provide to gambling operators. Much like changes to SEO algorithms, adapting to these changes swiftly and strategically is essential to maintaining their competitive edge and ensuring continued success.
Government regulation: The online gambling industry is heavily regulated, with varying rules depending on the jurisdiction. Gambling.com Group may be affected by government regulations both directly and indirectly through regulation on its gambling operator customers. Some government regulations that may impacts Gambling.com and operators include stake limits, protections for certain age groups and at-risk demographics, restrictions on the number of gambling operators a customer can use after losing an "unsafe" amount of money, limitations on promotional offerings, advertising restrictions, tax treatment, and more.
Customer concentration: Gambling.com Group serves approximately 250 gambling operators, however there is a significant amount of customer concentration among its top ten customers. The loss of one or more of these major customers would negatively impact the company. For the years 2023, 2022, and 2021, the ten largest customers accounted for 48%, 50% and 52% of our revenue respectively. The largest customer alone accounted for 16% of revenue in 2023.
Consumer sentiment towards online gambling: Consumer sentiment towards online gambling can significantly impact the industry's growth and stability. Negative perceptions, fueled by concerns over gambling addiction, financial losses, and the potential exploitation of vulnerable populations, can lead to stricter regulations and reduced participation. Public opinion can influence government policies, prompting legislators to implement more stringent controls, higher taxes, or outright bans on certain gambling activities. Additionally, adverse media coverage and social stigma associated with gambling can deter users from engaging with online platforms, directly affecting the revenue streams of gambling operators and, consequently, companies like Gambling.com Group.
Macro-economic conditions: Macroeconomic conditions, including recessions, may impact Gambling.com Group. During economic downturns, consumers are less likely to spend money on gambling activities, and gambling operators may reduce their marketing expenditures. Some have argued that online gambling may be a recession resistant industry as consumers should still be willing to put down a few bucks on a sporting even to make things interesting. I disagree with this perception. Reduced disposable income and increased financial caution during recessions generally lead to decreased discretionary spending, including on gambling. Consequently, both the demand for gambling services and the marketing budgets of online gambling operators are likely to decline, adversely affecting Gambling.com Group’s revenue streams.
Media Partnerships become a cost: Gambling.com Group has signed multi-year contracts with three major media companies. The terms of these agreements are not publicly known. My concern is that Gambling.com Group may have annual guarantees with media partners that they will have to pay regardless of performance. It is possible that media partnerships become a drag on revenue if they are unable to recover meaningfully from the Google update.
Other risks that Gambling.com Group may face include cybersecurity threats and system failures that could impact websites, apps, and platforms; the performance and reliability of third-party platforms, including media partners; environmental, social, and governance (ESG) issues; currency fluctuations; and challenges related to their status as a foreign private issuer.
Performance
Over the past five years, Gambling.com Group has achieved a compound annual growth rate (CAGR) of 54.1% in revenues, driven primarily by organic growth as the U.S. market began regulating, as well as continued expansion in Europe and strategic acquisitions. North America is the company's largest market, accounting for 56% of revenues in 2023, or $60.8 million. This is followed by the U.K. and Ireland, which contributed 28.9% of revenues, or $31.3 million.
The online casino market is Gambling.com Group's largest revenue source, making up 61.5% of total revenues, or $66.9 million, in 2023. Online sports betting follows, accounting for 37.4% of revenues, or $40.6 million. Despite the political challenges associated with online casino regulation, it is expected to continue growing at a higher rate than sports betting. According to Charles Gillespie in Gambling.com Group’s Q4 2023 earnings call, iGaming states including Michigan, Connecticut, Delaware, New Jersey, Pennsylvania, West Virginia, and Rhode Island generate roughly the same amount of revenue as all the sports betting states combined.
Gambling.com Group aims to achieve long-term EBITDA margins of 35%-40%. The gross margin decline is the result of increased cost of sales or fees paid to Gambling.com Group’s media partnerships. I am expecting an increase in the gross margin due to media partnerships being rendered less effective. During their Q1 2024 earnings call, the company projected cost of sales at $4.8 million, down from $10 million. To me, that indicates a roughly 50% drop in the effectiveness of media partnerships, although it is still early to draw definitive conclusions.
As mentioned prior, Gambling.com Group continues to outperform its peers in terms of return on invested capital (ROIC). The company's balance sheet is robust, with no long-term debt and strong cash flow. In the past year, Gambling.com Group secured a $50 million credit facility with Wells Fargo Bank, consisting of a $25 million term loan and a $25 million revolving credit facility. This financial flexibility enhances the company's capacity for mergers and acquisitions, positioning it well for future growth.
Turning to free cash flow and new depositing customers (NDCs), Gambling.com Group has demonstrated consistent growth, showing a solid start to 2024. In 2023, the company generated free cash flow of $16.2 million, resulting in a free cash flow margin of 14.9%. The number of NDCs reached 425,000 in 2023, representing a 55% increase from 2022. In the first quarter of 2024, NDCs grew by 22% compared to the same quarter in 2023. It's worth noting that Gambling.com Group experiences some seasonality in its business, primarily due to the U.S. sports calendar, with Q2 typically being the slowest period.
Investment Thesis
Gambling.com Group has declined approximately 45% from its 52-week highs back in August of 2023. This has been the result of slowing growth in the UK and Ireland market, and a slight decline in revenues in the European and other market primarily the result of compliance related changes for Germany. Additionally, investors were thrown by lower than expected EBITDA margins despite higher than expected revenue and revenue beats in the first quarter of 2024.
In May, Google announced an updated 'site reputation abuse policy,' significantly impacting the search engine algorithms and rankings of sites using third-party affiliate offers, which include Gambling.com Group's media partnerships. During the first quarter 2024 earnings call, CEO Charles Gillespie addressed this update, stating, "This is not a typical update to Google's algorithms, but rather a global policy shift that affects all industries, not just online gambling. Google has effectively moved the goalpost on what they deem to be acceptable locations for particular types of commercial content. Virtually all media partnerships, including the ones in the online gambling industry and our own, have been affected. We remain committed to our media partners as they organize to make a concerted effort to push back on what they perceive to be an overly broad implementation of this new policy."
In response to the policy, Gambling.com Group lowered its 2024 revenue guidance to $118 - $122 million from $129 - $133 million, and adjusted EBITDA guidance to $40 - $44 million from $44 - $48 million, which still represents a 14% year-over-year growth rate at its midpoint. Nonetheless, the developments over the past year have led to Gambling.com Group falling out of favor with investors.
I believe the decline in Gambling.com Group’s stock price is an overreaction. The company has significant growth potential with numerous jurisdictions just beginning to regulate or yet to regulate online gambling, including Japan, Brazil, Canada, Mexico, and various European countries. In the United States, 43 states have yet to regulate online casino gambling, and several large states, such as Texas and California, have yet to regulate online sports betting.
As of early July 2024, there are ballot initiatives to regulate sports betting in Mississippi, Oklahoma, and Missouri. Additionally, New York, Illinois, Mississippi, and Massachusetts have initiatives for online casino regulation or expansion. While I do not intend to project revenues based on the timing of regulatory changes, I anticipate that Gambling.com Group will easily experience low to mid-teen growth through 2030 as more jurisdictions come online, consumer interest for online gambling grows, and the company continues to gain market share. Although not included in my growth estimates, I believe that Gambling.com Group is well positioned to continue pursuing strategic acquisitions that expand its performance marketing offerings. The company maintains a lean balance sheet and has not yet utilized its access to capital through the Wells Fargo credit facility, providing significant financial flexibility for future growth initiatives. Charles Gillespie has remarked that Gambling.com Group has “widened the aperture in terms of what we are considering from an M&A perspective and are no longer only looking at SEO-driven gambling affiliate businesses.”
With respect to Gambling.com Groups’ media partnerships, there is no doubt that what I perceive to be one of the company’s competitive advantages has been somewhat undermined. The recent Google update significantly reduced the effectiveness and reach of Gambling.com Group's media partnership content, consequently decreasing the number of new depositing customers (NDCs) generated from these arrangements. However, this impact has been somewhat mitigated by an increase in traffic to Gambling.com Group’s own sites, which have risen in Google rankings due to reduced competition. The likely outcome of the Google update in the near term will be a lower referral volume and reduced fees paid to media partners, which will decrease the cost of sales and improve gross margins. Gambling.com Group will benefit from increased traffic to its owned sites, where they earn the full fee on new depositing customers (NDCs). During Gambling.com Group’s Q4 2023 earnings call, Charles Gillespie estimated that only about 15% of revenues would come from media partnerships in 2024, a significant but not critical amount.
It’s important to note that this development has had an industry-wide impact, affecting competitors as well. As with any major update in the digital marketing space, companies and strategies will recalibrate over time. Media partners are likely to remain a part of Gambling.com Group’s strategy, but the dynamics of affiliate links and how they are set up may change, potentially becoming more expensive to operate. Companies may turn to other sources, including podcasts, social media influencers, and YouTube creators, to drive traffic to gambling operators.
As the true impact of the Google update becomes clearer, I expect investor sentiment to improve and refocus on the growth potential of the online gambling industry. Gambling.com Group is likely to remain a competitive operator and is well positioned to make necessary capital investments if there is a pivot in strategy. Although there are few ballot initiatives for online gambling through the rest of 2024 and into early 2025, new catalysts are likely to reinvigorate investor excitement for Gambling.com Group, resulting in stock appreciation.
Using a combination of valuation methods, including a discounted cash flow (DCF) model, reverse discounted cash flow (RDCF) model, and ratios such as P/FCF and P/trailing earnings, I estimated an average conservative fair value of $13.50 per share for Gambling.com Group. This valuation assumes a return on invested capital (ROIC) of 20%, a variable growth rate starting at 15% and declining to a terminal value of 3.5%, a discount rate of 10%, and operating margins of 20%. According to the RDCF model, Gambling.com Group would only need to grow its free cash flow (FCF) by 7% annually to justify its current price of approximately $8.25. This growth rate appears modest given the company’s significant growth prospects, both organically and through the regulation of online gambling in more jurisdictions. At the current price of $8.25, my fair value estimate provides a margin of safety of approximately 39%, offering a potential upside of 63%.
Moving forward, I intend to monitor Gambling.com Group’s efforts to mitigate the impact of the recent Google update. While the long-term effects of this update remain uncertain, it is easy to perform general Google searches for online gambling to see where Gambling.com Group sites are currently ranking. The success of Gambling.com Group directly correlates to the growth of gambling operators and keeping my finger on the pulse of companies such as DraftKings, BetMGM, Ceasar, and Penn will likely provide insight into industry conditions. Additionally, I plan to monitor overall consumer sentiment towards the online gambling industry and track any legislative developments that could negatively impact the company if adopted on a larger scale.
Personally, I don’t know a whole lot about the activity of online sports betting, but I would say “the line is working for you” with respect to Gambling.com Group. Thanks for reading.
