Last week Disney (DIS) invested $250 million in fantasy sports wagering site DraftKings.com, valuing the second largest fantasy sports site at $900 million according to The Wall Street Journal.
MGT Capital (web site) owns and operates the third and next largest fantasy sports wagering site at DraftDay.com and yet the company has a current market capitalization of just $5.5 million vs. the $900 million valuation of DraftKings.com with Disney’s investment. This investment by Disney not only legitimizes the online fantasy sports wagering market, we believe it makes NYSE/MKT listed MGT Capital Investments Inc. (MGT) a strong buy. MGT Capital currently trades at just .46/share.
January 2015 Investor Presentation
Fully diluted shares: ~ 12 million
Market cap: ~ $5.56 million
Insider ownership: ~ 20%
Fantasy Sports wagering is currently legal in 45 states and Canada, operating under a carve-out of the Unlawful Internet Gambling Enforcement Act of 2006. Legislators deemed Fantasy Sports games of skill and therefore not considered gambling.
According to The Fantasy Sports Trade Association, Fantasy Sports represents a huge opportunity with over 45 million fantasy sports players in North America, up from 15.2 million in 2003, a 10% compound annual growth rate. In the US alone, the total expenditure on fantasy sports is $3.64 billion. Fantasy sports is such a large draw that during football season, 17% of ESPN’s 90 million unique website visitors are fantasy sports players.
Daily fantasy sports wagering is growing at an even faster pace. The largest daily fantasy sports wagering platform FanDuel paid out $10 million in winnings to its users in 2011. In 2014, the payout grew to $400 million. The industry is projected to grow to $31 billion in player entry fees by 2020. Fantasy wagering platforms take roughly 10% of entry fees as revenues and payout the remaining 90% in prizes meaning the industry is projected to grow by 0ver 85% per year over the next six years.
In addition, the fantasy market’s potential to acquire customers from the US Sports Betting Market presents a huge opportunity. Eilers Research estimates Americans spent $160 billion on non-regulated sports gambling in 2013, 44 times the amount $3.6 billion spent in Nevada.
If online fantasy platforms could tap a small portion of the non-regulated sports betting in the United States there is a huge opportunity for fantasy platforms.
The growth and legality of daily fantasy sports wagering is attracting heavy investment from some of the largest private equity, media, and entertainment companies in the world. In September 2014, FanDuel raised $70 million from NBC Sports Venture, KKR and Shamrock Capital Advisors. There was no valuation announced at the time of the deal but sources put the valuation for FanDuel at just south of $400 million. According to Fortune, FanDuel is considering another round of financing that would value the company at $1 billion. With FanDuel’s estimated payout of $400 million in 2014, its revenues are roughly $45 million, placing its September 2014 fundraising valuation at 9 times revenues and it current expected valuation of $1 billion at 22.5 times revenues.
The second largest player in the industry, DraftKings, paid out roughly $200 million in 2014. The company raised $41 million in August 2014, placing its value at just under $250 million. On April 3, 2015, ESPN’s parent company, Walt Disney invested $250 million in DraftKings, valuing the company at roughly $900 million. The entrance of Disney into the industry adds a tremendous amount of credibility to the industry, painting it in a more favorable light. With estimated revenues of $22 million in 2014, DraftKings’ August 2014 valuation places the company on 11.25 time revenues. The recent investment by Disney values DraftKings on 40.5 times revenue.
The fantasy sports online platform industry is growing at a very rapid pace with a significant runway for growth. The industry is also receiving investment from some of the biggest private equity, media, and entertainment companies in the world validating these growth estimates and the business model. The valuations of the investments are placing MGT’s two closest competitors at close to a billion dollars each, while MGT the owner of the 3rd largest daily fantasy wagering platform enterprise value is only 3.26 million.
We believe recent investments in FanDuel and DraftKing drastically increase the probability of investment in, or outright acquisition of MGT Capital.
In addition to having the 3rd largest daily fantasy wagering platform, MGT Capital is innovative in driving traffic through its site and generating additional revenues by partnering with leading entertainment brand. These partnerships illustrate the company’s emphasis on the Business-to-Business market. In this market, MGT offers a broader style and variety of game contests.
The company recently announced a partnership with Seneca Gaming Corporation (press release) where players at Seneca Resorts & Casino properties will be able to play their favorite fantasy sports on an easy to use website featuring multiple game formats in seven sports. The site will be available for play online, and will feature the addition of exclusive games for the property.
MGT also announced a partnership with the leading adult entertainment company, Vivid Entertainment, LLC. The new partnership will develop and market a fantasy sports gaming site available online at VividBetSports.com. The partnership will drive additional traffic to DraftDay.com and be an additional source of revenue. It takes advantage of a shared demographic between Vivid and fantasy sports, male with an average age of 34. Adult websites also get more visitors each month than Netflix, Amazon and Twitter combined, with over 30% of the internet’s bandwidth used for adult content. Partnering the preeminent adult company and a leader in the daily fantasy sports segment, the companies created a marriage between one of the fastest growing internet business segments and one of the largest sources of unique online traffic.
The company also recently announced its mobile app Rapid Fire. DraftDay Rapid Fire presents a new way to play daily fantasy sports while on the go. Players will enjoy all their favorite fantasy sports with Rapid Fire. Two variations are offered: Rapid Fire and Rapid Fire Max. Winning prizes range from roughly double the entry fee to nearly 20 times.
The company was the first sports wagering platform to launch a social media platform, Daily Fantasy Legend, enabling users to play on Facebook with virtual currency, thereby expanding daily fantasy sports to a wider audience, including those aged thirteen and up and those unwilling to play with cash. Daily Fantasy Legend also creates a community environment enriching the social aspect of the game.
Growth in the market and MGT’s initiatives has lead to a significant growth in revenues. In Q3 2014, the company reported year on year revenue growth of 643%, a extremely healthy gross margin of 43%, and a 44% decline in operating expenses.
Given the investment in or potential acquisition of MGT, the best way to value the company is to look at recent transaction valuations.
A very conservative estimate of 2014 revenues is $1.2 million. MGT Capital did not acquire DraftDay until after the first quarter of 2014 and the company’s combined revenues in Q2 and Q3 of 2014 was $617,000. Annualizing this figure does not account for growth and is therefore very conservative but provides the $1.2 million used in MGT’s valuation. The low-end valuation uses 9 time revenues multiple similar to FanDuel’s mid-2014 valuation. MGT’s conservative low-end valuation is $10.80 million or 94% upside. The high end used a 40.5 times revenue multiple from Disney’s most recent investment in DraftKings. MGT’s high-end valuation is $48.60 million or 774% upside.
The Bottom Line
MGT Capital is a leading player in the fast growing fantasy sports wagering industry. It is creating innovative partnerships with leading entertainment business and is extremely undervalued relative to peers. We believe recent investments by industry giants like Disney validate the space and make MGT a strong candidate for a comparable investment or a potential buyout based on its extremely low valuation at current share prices.
- MGT Capital Investments, Inc.
MGT Capital Investments, Inc. is publicly traded under the symbol MGT on the NYSE MKT exchange and is a holding company for its wholly and majority owned businesses.
- MGT Sports, Inc.
MGT Sports, Inc., a wholly owned subsidiary, owns 100% of DraftDay.com and a majority interest in FanTD LLC, online daily fantasy sports wagering businesses. MGT Sports also owns FantasySportsLive.com, an online portal for fantasy sports news and commentary.
- MGT Studios, Inc.
MGT Studios, Inc., a wholly owned subsidiary, is an online and mobile game developer. It operates www.mgtplay.com, a skill-based game platform in partnership with M2P Entertainment GmbH.
- MGT Gaming, Inc.
MGT Gaming, Inc. holds certain intellectual property patents focused on casino slot machines. MGT Capital holds 55% of the issued share capital of MGT Gaming
Disclosure: The publishers of MicrocapResearch.com are long shares of MGT purchased in the open market.
Receipt of $20,000 from MGT Capital Investments Inc. for our coverage above.
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