Late last week, sports data company Genius Sports (GENI 0.39%) plunged more than 10% in just one trading session. Interestingly, tech investor and CEO of Ark Invest, Cathie Wood, took advantage of the depressed stock price by adding 1.27 million shares to her position in the company.
On the same day, Wood also sold roughly 66,000 shares of e-commerce company Shopify. Perhaps this shouldn't be too surprising, as Wood has cut her position in Shopify by nearly half since April.
Nonetheless, it's curious why Genius cratered so much in just one day. Let's dig into what may have influenced the stock to drop so dramatically and determine if now is an opportunity to buy the dip.
What happened?
On Sept. 14, Genius Sports announced hat its largest investor, Apax Partners, was selling 20 million shares as part of a secondary offering.
Apax is a multibillion-dollar private equity firm that has offices and investments all over the globe. The fund invested in Genius in 2018, roughly three years prior to Genius' public market debut via a special purpose acquisition company (SPAC).
Although it may appear alarming that the company's largest investor is dumping shares, investors should zoom out and take some time to get a sense of the full picture. Upon analyzing Genius' regulatory filings, it becomes clear that Apax isn't exiting its position entirely. The investment fund owns roughly 60 million shares in Genius Sports. Therefore, upon completion of the secondary offering, Apax will have a significant position.
Image source: Getty Images.
How is the company performing?
When it comes to sports betting, the competitive landscape is ripe with players such as DraftKings, FanDuel, Penn Entertainment, and PointsBet. Most of these apps offer users similar features and promotions. One of the key differentiators is looking at the difference in odds (or lines) among sports books. And that's where Genius Sports plays a big role.
Genius Sports isn't just another mobile betting app. Instead, the company uses its relationships with the NFL, MLB, and PGA Tour, among other leagues, to marry data analytics from content with machine learning algorithms, thereby adding a sophisticated layer of data to oddsmakers.
In August, Genius reported earnings for its fiscal second quarter ended June 30. While total revenue increased 22% year over year, it was the company's betting technology segment that claimed the crown. Revenue from Betting Technology, Content & Services grew 27% annually to $57 million. Through the first half of the year, this category generated $122 million in revenue, growing nearly 29% year over year.
Given that the NFL season has just begun, and the MLB is gearing up for the playoffs and World Series, I wouldn't be surprised to see an uptick in sports betting activity for the next several months. Should this prove true, companies such as DraftKings and its competitors will be relying on data models from Genius to help set their odds.
Is the stock a buy?
I am not entirely surprised that Wood pounced on the dip in Genius Sports. The tech darling loves to own names that leverage and accumulate loads of data. For this reason, Wood has long been a supporter of DraftKings stock, which dominates the U.S. mobile sports betting market along with FanDuel. By owning Genius stock as well, Wood is building a strong, unique position in mobile sports wagering in her exchange-traded funds (ETFs).
Now, while Genius Sports is growing revenue at an impressive rate, investors should understand that the company is not yet generating positive net income. On a non-GAAP (adjusted) basis, Genius reported positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of $23.7 million through the first six months of 2023, which is more than quadruple its level compared to the first half of 2022. Moreover, management guided toward positive free cash flow for the back half of 2023 and expects the company to sustain this growth.
As of the time of this writing, Genius stock is trading right in the middle of its 52-week high and low. Given the rising popularity of sports betting, the dynamics of Genius' revenue growth and cash flow target make sense. I view this as an opportunity to lower your cost basis in the stock and encourage investors to hold long term. Should Genius reach consistent profitability, the company could very well emerge from under the radar.
