There is no doubt that Covid-19 will be a defining event in the lives of most investors as it stopped the world. It has disrupted the business models of many companies and resulted in unprecedented monetary and fiscal stimulus from Governments to keep economies alive.
As we have discussed many times, for businesses the impacts of Covid-19 were both positive and negative. Some of these were obvious; travel, hospitality and physical retail were hit hard, while enterprise software, ecommerce and stay at home entertainment received big tailwinds.
However, there have been many other businesses who have been impacted in ways that are not so obvious. My focus for the last few months in the Emerging Companies portfolio has been to try and identify businesses benefiting from Covid-19 disruption that is going undiscovered by the market and not reflected in the share price.
Jumbo Interactive (JIN) is primarily an online re-seller of Australian lottery tickets through its subsidiary ozlotteries.com. JIN has been riding a tailwind of lottery ticket sales moving online over the last few years (see graph below courtesy of Goldman Sachs) but this trend was accelerated during Covid-19 as newsagents were forced to close, driving customers to JIN and other online channels.
However, despite a sharp acceleration of the growth tailwinds, JIN trades at roughly the same price as it did pre-Covid-19. So why has it been left behind by the market? While the underlying growth trend is strong, JIN’s business is driven very heavily by large jackpots which cause spikes in ticket sales as casual lottery players who do not play regularly chase the big win. The image below from SimilarWeb tracks visits to the ozlotteries.com website and you can see the spike in July this year when there was an $80m jackpot.
Since July, there has been a run of small jackpots as Powerball and OzLotto have continually been won at lower levels. Unfortunately, the same time last year there were many large jackpots, culminating in an $150 million Powerball jackpot in September 2019. This means the comparison to last year’s numbers looks weak despite the strong underlying growth of the customer base. In a recent trading update, JIN’s management helped to provide a “normalised” look-through on the business, stating that for jackpots below $15 million (the threshold the company considers a “large jackpot”, driving more casual players) there was a 36% increase in sales.
Looking through this short-term period of lower jackpots, longer term it is expected for more large jackpots after a Powerball algorithm change in 2018 (with OzLotto expected to follow in 2021).
Tabcorp broke out their modelling back in 2019 to show how they expect increased jackpots moving forward:
Governments and Charities
Beyond the normalisation of jackpots after a weak year, JIN also has the potential for blue sky growth by licensing their online lottery distribution platform to other lotteries, both Government and charities. The value for customers comes from access to both JIN’s industry leading cloud-based product and large active user base of 3m.
Currently JIN has five domestic charities signed up to their platform, generating about $140 million in ticket sales. The runway is large, about 10 times the size in Australia and multiples larger in Europe/US where JIN has ambitions. Further to charities, JIN can also license their platform to Government lotteries who have not developed a digital distribution offering. Management has stated they believe at least six US state lotteries will begin to prepare for online lottery tickets, with only 11 of 48 states offering digital distribution. JIN is currently in an agreement with the Western Australian lottery for an initial three-year term. To provide a white-labelled platform which will hopefully be used a proof of concept for other customers.
We have recently added to JIN in the Oracle Emerging Companies portfolio given the quality of the business and the potential for strong growth as jackpots normalise and management shift their focus to overseas operations.
Some of the metrics I’m tracking to ensure the investment thesis remains on track, includes:
- Acceleration of the shift in Australia towards digital lottery ticket sales with JIN maintaining or growing their current market share.
- JIN continues to have success with domestic charities on the back of their large user base and leading online platform.
- No technical issues with the roll-out of the WA state lottery agreement which can act as a proof of concept to other potential Government customers.
- No large change to user metrics such as acquisition costs, churn, etc.
- JIN management sticks to their aspirational target of $1bn in ticket sales by financial year 2022.