Radnor Capital

Dad, Husband, Investor | Views are my own

[Radnor Capital @RadnorCapital]

I created a Substack account and posted my first piece: "2024 Review & 2025 Outlook" - link below and in my X profile.

I plan to use Substack for the same reasons I use X - to learn and to nurture my obsessive curiosity.

Please consider subscribing to my Substack if you enjoy my content on X.

Thanks for the support and I look forward to engaging with people across platforms.
https://t.co/RYAk6FtrSa

[Radnor Capital @RadnorCapital]

@851_171_997_129 @1ChartMaster Thanks as always BK. I’ll be back

[Radnor Capital @RadnorCapital]

@851_171_997_129 Thanks BK. Sometimes you get lucky

[Radnor Capital @RadnorCapital]

@ContrarianCurse A lot to be excited about fundamentally but HY spreads aren’t well <300bps early in the cycle

[Radnor Capital @RadnorCapital]

@GrowthBanker @carrynointerest @ArfurRock @SecretCFO Thanks for the shout out!

[Radnor Capital @RadnorCapital]

@SHM_Bull @matthughes13 Thanks for sharing!

[Radnor Capital @RadnorCapital]

The comparison for me is vs USD, which is the currency I am paid in. Not a currency I want to hold for any reasonable period of time. That’s the basis for the “currency” and “should be owned” comments. This is an allocation that has worked and I suspect it will continue to work given the underlying drivers haven’t (and probably won’t) materially changed.

[Radnor Capital @RadnorCapital]

@MF_Camillus I don’t manage my PA for the “near to intermediate term”

[Radnor Capital @RadnorCapital]

@sadandlonely_69 Well said. Appreciate the perspective

[Radnor Capital @RadnorCapital]

Sport Radar $SRAD reported this morning, and the stock is up ~10%. They are the leading provider of data and analytics to the sports ecosystem (most importantly sports betting books). Think of it as a “picks and shovels” play on the growth of online sports betting / fan engagement globally.

I’ve been long this stock for a couple of years, and it has done nothing – my blended cost is just under $10 (stock currently ~$10.45). You would have been better off putting your money in the S&P 500 and forgetting about it (I recommend this to young investors with time on their side). Also, important to note that being early is often indistinguishable from being wrong. So do your own work.

So why has the stock of a rule of 40 (revenue growth rate + profit margin > 40%) company trading <10x 2025 EBITDA done nothing? I think its mostly mechanical / technical, but I’ll start with the fundamental argument.

Sport Radar (along with their only real competitor, Genius Sports $GENI) sits between the leagues and the sports books (also media companies but that’s beyond the scope of this note). Any time you find yourself between the owners of content (leagues) and those who own the customer relationships (sports books like Draft Kings $DKNG, which I own in size), there’s risk of getting squeezed. I’ve spoken with the heads of gambling for all the major sports leagues, as well as the major sports book CEOs, and am confident this won’t happen. If it did happen, it would show up in ROI – meaning leagues would continue to raise sports rights costs and Sport Radar wouldn’t be able to do enough business with the sports books (and media companies) to earn a meaningful return on their investment. Bears would start saying “they overpaid” for sports rights. Fortunately, we’re already seeing signs that this isn’t the case – this morning we saw flat EBITDA margins y/y at 18%, despite a massive ramp in sports rights costs for the NBA and ATP (interestingly, tennis is the second most bet on sport globally). These sports rights costs are straight line amortized over the life of the investment, so the costs (I in ROI) will remain flat for the existing contracts, while the betting volumes grow, and more value-add products / services are offered to the sports books (R in ROI). Also means that year 1 of these almost 10 year contracts will be the least profitable. This will prove meaningfully accretive to margins, which should approach ~25% by 2026 (street ~22%) and ~30% longer term, from ~18% today.

We’ve also seen turnover at the CFO and IR level, but I’m confident they have the right team in place to win. Their messaging has never been more concise, focused, and consistent. And they just hired a new CFO that I know well and respect.

I focus on fundamentals, but we can’t ignore the mechanical / technical overhang. The stock is relatively illiquid for a ~$3bn market cap, given >60% of the company is owned by insiders: Canada Pension Plan, Tehcnology Crossover, and Radcliff. If you’re a PM, its just easier to express a bullish view on sports / betting by owning Draft Kings (again, I like them both). Sport Radar is a more complicated story, with a much lower float, and it hasn’t gone anywhere in a couple of years (no bid) – so why bother?

My best guess (again, I’ve been wrong) is that sentiment around this stock mimics what Draft Kings was a couple years ago – people thought Draft Kings was a decent business but would never be a good stock because they would never get leverage on their massive customer acquisition costs. Draft Kings is up ~4x since that narrative was popular.

Bull case math for Sport Radar suggests 2026 revenue could be ~$1.5-1.6bn (vs. street ~$1.3-1.4bn) and almost $400mm EBITDA (vs. street ~$300mm). I get there using a ~20% revenue CAGR (which we have visibility into given the contracted nature of their business) and a ~25% EBITDA margin (low end of their 25-30% long term target). So even if we don’t get multiple expansion (which I find hard to believe, given the upside to numbers), the stock should theoretically compound with earnings growth >20%.

A few other thoughts from the call…

Revenue grew +28% y/y and EBITDA +29% y/y in Q1, despite elevated sports rights costs. US revenue grew +65% (~25% of total) and rest of world +19% (~75% of total). Raised full year guidance (although by less than the beat, but this is conservatism – the current CFO wants the new CFO to have a low bar when he starts in June). Also $5-6mm of project costs moved from Q1 to rest of the year. As confident as ever with operational structure and margin trajectory. NRR (net retention rate – basically the growth from existing customers minus churn) accelerated to 116%, from 111% in Q4 2023. Announced intention to commence share repurchases under $200mm authorization in the next trading window – they agree that their stock is undervalued. Strong balance sheet with ~$275mm net cash and generating substantial free cash flow. Excited about Alpha Odds product – new AI-driven odds technology that has helped operators boost profits, most notably by an average of ~15% during this years UEFA championship qualifiers. Alpha Odds is currently live in soccer, but they plan to launch soon with tennis and basketball, before adding 3 more sports by Q1 2025. Announced Chief AI Officer, Behshad Behzadi, who previously helped spearhead AI initiatives at Google $GOOGL. Brazil legalized sports betting last December and sports book licenses will be awarded this summer – this will be a large sports betting market (think ~$5-6bn GGR in next few years). Asia opportunity in India and Japan. African countries like Nigeria, South Africa, and Ghana. Confident in MLB partnership and should continue to have 3 of the 4 major US sports leagues under their umbrella (Genius has the NFL). NBA contract is off to a great start – a lot left to unlock with the NBA. Advertising continues to be an opportunity – programmatic and paid social – ranks as one of top global advertisers in online betting and casino space. Ads is just one of the many ways to profitably leverage their massive datasets for the benefit of customers.

Anyone looking to ramp on this name should chat with Ryan Sigdahl at Craig Hallum. He’s the best on the street and a class act.

[Radnor Capital @RadnorCapital]

@userface02827 Unfortunately not as close to it as I was but appears to be a meaningful change in the landscape

[Radnor Capital @RadnorCapital]

Draft Kings $DKNG reported and the stock is down ~8%. I continue to have conviction, and under normal market conditions (incredibly volatile day) this is not a -8% print. I've owned Draft Kings since it came public in 2020, and while its been a volatile ride, the trend has been higher. I took some risk off the table in 2021 and have been adding opportunistically since then. The ride continues to be volatile, but I expect the trend to continue higher as they execute on a massive online gaming opportunity in the US.

I see this as a clearing event for 2024, with the most material long term business risk being around the tax surcharge in the 4 states that have tax rates >20% and the potential impact on consumer behavior. This will be implemented in 2025 and I will discuss more below.

The headline “miss” is not something we are used to seeing and there were certainly negatives in the quarter (which were telegraphed by management), but these negatives are explainable, and I continue to have confidence in the business model and industry trends.

Draft Kings raised their 2024 revenue guide, which now implies growth >40%, but meaningfully cut their EBITDA guide by $120mm to $380mm ($500mm prior). There are several reasons for this. The IL tax hike accounting for ~$50mm. Jackpocket losses – they acquired Jackpocket earlier this year and they expect it to be profitable in 2025 – I see this as an important user acquisition tool. The Washington DC launch accounting for ~$30mm – upfront investments to win new markets. ~$12mm from unfavorable sport outcomes (bad luck, which typically evens out). And a ~$23mm hit from higher customer acquisition, given higher than expected user growth. DKNG grew paying users +50% (+34% ex Jackpocket) in Q2, which is a positive for the business long term. This is still a relatively immature legal industry and investing behind customer acquisition / retention makes sense to me. Important to note that customer acquisition costs on a per user basis are trending lower, which proves that the guidance reset is a function of higher user counts (and investing in those users). Also, the raised revenue guidance reflects their success acquiring users. ARPU was down because of the new Jackpocket customers. This makes sense.

Management expects the healthy user acquisition environment to continue through 2024 and they indicated that the US online gaming opportunity could be even larger than they previously thought (industry data supports this claim). They are also not seeing any signs of weakness in the consumer with strong cohort behavior across the board – hard to tell how much is unique to their industry, given the broader consumer slowdown.

Importantly, the 2025 EBITDA (which is a close proxy to FCF for this business) guide was maintained at $900mm - $1bn, which can be viewed as a de facto raise, given management is now including the impact of the IL tax hike, without including potential upside from the tax surcharge.

As I mentioned, DKNG is implementing a gaming tax surcharge in high tax states (IL, NY, PA, VT where tax rates >20% of GGR), which is not embedded in 2025 guidance. I estimate the EBITDA benefit could be $200-300mm, but a lot depends on whether GGR holds. The questions here are whether others (primarily Fan Duel $FLUT) will follow and whether consumers will care. DKNG defending their margins with a low single digit % surcharge seems like a prudent move – customers obviously don’t like incremental charges, but DKNG has established brand loyalty, and while 5% is meaningful to DKNG, its less meaningful to customers, considering low average bet size. Also, betting is far more of a leisure activity than a way to make money (for most), which makes the 5% easier to digest. Tax surcharges are not uncommon in gaming and other industries – for example, hotels and taxis have taxes that get passed onto the consumer.

I don’t expect any further tax hikes in the near term (NJ is clear) and continue to believe IL was a perfect storm of a democrat governor / congress and massive budget deficits. It’s also important to note that IL is the home of Rush Street Interactive $RSI, which could explain the progressive nature of the tax, which protects smaller players. Importantly, the illicit market continues to be rampant, which is something the regulators need to consider when evaluating further tax hikes. Illegal sportsbooks obviously don’t pay taxes, which allows them to reinvest more in an increasingly attractive product.

Management also announced a plan to buyback $1bn worth of stock, which accounts for 6-7% of the current market cap.

Over the last few years, my estimates have been well above guidance, given managements history of conservatism. After this print and expectations reset, they need to reestablish credibility and momentum – I think it’s safe to assume they can do ~$1bn in FCF in 2025, which implies the stock is now trading ~16x FCF. I see this as very reasonable for a company compounding growth well >20% (with plenty of new state opportunities ahead in OSB and iGaming) and inflecting to meaningful profitability.

[Radnor Capital @RadnorCapital]

@sadandlonely_69 Not as close as I was but like your thinking. Any risks here from prediction markets?

[Radnor Capital @RadnorCapital]

@AnalysisOp They certainly don’t have it all!

[Radnor Capital @RadnorCapital]

@hedgedmonk I haven't but sounds like I should pick it up!

[Radnor Capital @RadnorCapital]

@hedgedmonk well said. although nice to see the current administration as more supportive and silicon valley returning to defense / hard tech

[Radnor Capital @RadnorCapital]

@Cric_it_is A lot of ways to win! None more important than the continued debasement of fiat currencies thanks to out of control deficit spending and the subsequent money printing that results

[Radnor Capital @RadnorCapital]

Gold loves rate cutting cycles and will continue to move higher. Lower opportunity cost, dollar weakness, safe-haven demand, etc. Gold also has a strong negative correlation to "real" rates (nominal interest rates - inflation rate) - when the Fed cuts, nominal interest rates fall, and those lower rates ultimately stimulate inflation, which leads to even lower (and sometimes negative) "real" rates. Gold has and will continue to discount this phenomenon.

On a related note, I've never been a Fed critic (there are already too many and it's an impossible job) but if the Fed needs a September jobs report to get comfortable with a cut later this month, they are missing the bigger picture. Clear signs of employment pressure and disinflation should be empowering. Remember, we are just trying to get back to neutral...

On the jobs front, when average weekly jobless claims start to approach ~300k, its already too late. Moreover, "shelter" accounts for ~35% of the CPI index and that component was up +3.6% in August vs. the overall reading of +2.9%. Shelter is considered a lagging indicator in CPI because the changes in shelter costs, particularly rents, are incorporated into the index gradually rather than immediately. For context, the S&P Cotality Case-Shiller U.S. National Home Price Index (more accurate and direct measure) recently came in at +1.7%. Adam Crisafulli calculated the following: if you substitute the +1.7% home price number for the +3.6% shelter number, CPI would be only +1.4%...

The Fed needs to cut, and gold loves that.

Three clear counterpoints to the above around interest rate cuts: 1) we haven't seen the full impact of tariffs on prices - however, this is a one time change in the level of prices vs. recurrent inflation. Regardless, needs to be monitored. 2) consumer spending is resilient and business activity remains robust, leading to strong corporate earnings. S&P 500 earnings will grow >10% this year. 3) risk appetite appears elevated, with equity valuations around record highs (P/E >20x) and credit spreads close to record tights (HY OAS <300bps). AI euphoria (some of which is justified) is also supporting this confidence among market participants.

A counterpoint to gold loving rate cuts: for heavily indebted economies, lower rates lead to lower interest expense, which leads to lower deficits. I value gold at 1/T, where T is Trust in the financial system. Lower deficits, all else equal, increase Trust, leading to a lower price of gold. However, the US is so indebted with so much "mandatory" spending, that even with less interest expense, we will run deficits as far as the eye can see.

[Radnor Capital @RadnorCapital]

I continue to see bitcoin and gold as important elements of an investment portfolio. Both protect against the debasement of fiat currencies and fiscal irresponsibility. Those of us that get paid in USD often forget the importance of a "store of value." Ask anyone in countries like Argentina, Sudan, Zimbabwe, Turkey, etc.

I continue to own both, with bitcoin being the larger allocation given recent price action. I have also added to my bitcoin position since the election. Bitcoin feels more levered to a risk-on environment and has more torque around the adoption thesis, while gold is more levered to fear, with thousands of years of back tested history.

Gold quietly around all-time highs is telling us something about the direction of real interest rates. More importantly, its telling us there is growing distrust in fiat currencies. The best way to track the value / depreciation of the US Dollar is through the dollar price of gold, not a basket of other currencies.

Let’s also not forget that owning high quality stocks (the S&P 500) can protect against dollar debasement (priced in USD) and inflation (pricing power) and are far easier to value, given the cash flow characteristics. This is the bulk of my personal portfolio.

[Radnor Capital @RadnorCapital]

@Cric_it_is &gt;20% of our debt is short term, which has benefited from rate cuts. Refinancing is going to be rough, but the long end looks to be headed in the right direction.

[Radnor Capital @RadnorCapital]

@ApeMyBags absolutely. Same underlying drivers. BTC more risk on and gold more risk off.

[Radnor Capital @RadnorCapital]

@851_171_997_129 thanks BK

[Radnor Capital @RadnorCapital]

@TiehackCapital Agree with your mental model John