JPM says PointsBet can't have its cake and eat it

Broker JP Morgan has initiated with an underweight rating on sports betting business PointsBet saying it is overvalued as customer acquisition costs (CAC) in the US market place too much pressure on cashflows.

In a research note titled, 'You can't have your CAC and eat it', the broker says PointsBet's current CAC is almost 1.5 times more than rivals as it attempts US expansion.

Like other bookmakers seeking market share in the recently deregulated US sports betting markets, PointsBet commonly offers customers promotions, such as early payouts, risk-free bets, or bet boosts to attract new customers.

According to JP Morgan the average CAC in the US is US$340, but for PointsBet it's ~1.5 times greater. As a result of the high CAC, JP Morgan concludes PointsBet's balance sheet will come under pressure in 2021 as it invests to expand into additional states.

JP Morgan also warns PointsBet faces deep-pocketed international competition. It says PointsBet has a "lack of media channels/assets to compete with Flutter, DraftKings and GVC Holdings,which have bigger balance sheets for marketing, but most importantly, strategic partnerships and routes-to-market which are vertically integrated (i.e., JV w/FOX Bet; Daily Fantasy Sports, etc.).

The broker says US sports betting industry revenues could reach US$5.6 billion by 2024, but on a base case assumes PointsBet wins 10 per cent market share by 2024.

This would equal US sports betting EBITDA of $US95.2 million on revenue of $US656.6 million by 2024 according to the broker's forecasts. JP Morgan reaches a $5.06 per share valuation on these assumptions.

PointsBet shares are down 7.7 per cent to $5.60 this afternoon.