Post-mortem: Aspire Global

Disclaimer: The information provided in this post is not to be considered as any form of investment advice. I might buy or sell shares in any companies discussed in the post without notifying readers of the blog. I currently do not own shares in Aspire Global.

I recently sold all my shares in Aspire Global. The company is active in the ”iGaming”-industry, or to put it more bluntly, online gambling-industry. It was founded in 2005 in Israel, but has been listed on the First North Growth Market in Stockholm since July 2017, while simultaneously being headquartered in Malta.

Aspires revenue is split into two segments, B2B and B2C. In the B2B segment, the company provides a complete platform for iGaming operators, taking care of every aspect of running the daily business except for driving traffic, which is left to the operator. If you wanted to start an online gambling site today providing casino, sports betting and bingo, reaching out to Aspire Global and slapping your brand on their platform is probably one of the easiest ways to get started. Most of the revenues in this segment comes from revenue sharing with the operators. In the B2C segment they have their own brand, Karamba, directly facing consumers.

As was the case with most stocks I bought during the time around which I bought Aspire, I did not do enough research on the company, as I just didn´t spend that much time managing the portfolio. The thesis was quite simple though: the entire gambling sector in Sweden was trading at low multiples due to the new legislation that was put into effect at the start of 2019 that requires licenses for all operators and put serious limitations on what kind of advertising and bonus schemes the sites can run. Aspire, with very limited exposure to the Swedish market, was the cheapest of them all (or at least the ones I considered), despite growing revenues at a very high pace (45% YoY Growth in revenues 2017 -> 2018). I fet like the gambling sector as a whole, and Aspire in particular, was just temporarily out of favor and way to cheap.

Over the course of 2019, the stock has performed very badly dropping around 40% to a point where it now trades somewhere between 6-7 times earnings, while total revenue is probably going to have grown somewhere along the lines of 30% in 2019. On the face of it, this seems incredibly cheap (and it might very well be), so why the heck am I selling?

There are several reasons. One is that the business doesn´t seem to be scaling well. While I expect the company to report annual revenue increase of around 30% YoY in their upcoming annual report, EBIT and EBITDA numbers for 2019 will probably be up more like 10%. Margins are down across the board. If we zoom in on the B2B segment, on the face of it, things seems to be going fine with revenues likely to be up something like 45% YoY, and EBITDA up around 35% YoY. Pretty massive numbers, but also a pretty big divide between increases in revenue and EBITDA. This confuses me quite a little, as I would expect margins to actually increase the more this segment grows. Regardless of whether the growth comes from old partners increasing revenue or signing new ones (they did sign quite a few over the last couple of years), this should improve margins as a lot of the costs (overhead, technology etc) should remain fairly flat. If we combine this with the fact that ”Distrubtion expenses”, the post on the income statement that contains royalties paid to operators, has gone from 56% of revenue in 2015, to 63% in 2018, to 68% in Q1-Q3 2019, it seems like Aspire is gaining new business by offering better terms to potential new operators and keeping a lower share of revenus themselves, rather than by providing a superior product. This has also been implied in the comments made by the company, where they claim that they are ”offering operators incentives to grow”, which again, seems weird to me. Operators should have all the reason in the world grow, regardless of their cut on the revenue.

Aspires own B2C-segment has done poorly in 2019. Revenues are likely going to be up by a few percent, whereas EBITDA is likely to be around 35% lower in 2019 than 2018 by my estimates. According to the company this is due to higher marketing expenditure and temporarily low activity in the UK and Netherlands. Maybe this is just a temporary blip, but I can´t seem to fight this feeling that this might happen to several of Aspires clients over time.

To expand on that, Aspire mainly caters to smaller, less known operators. Compared to most other operators, Aspire is a little bit different in that they have managed to have a higher Hold% over time, meaning that for every dollar of net gaming revenue, they have paid less back to the players and kept more to themselves and their partners. They also have a lower retention rate than the sector average. As markets gets regulated and the ability to advertise freely and use bonus schemes to retain players might be compromised, it seems likely to me that brand awareness and customer satisfaction will be of increasing importance. Aspire and their operators generally scores poorly on both. Over the next couple of years, I think it´s likely that we´ll see considerable consolidation in the sector, where large operators gets even bigger and the smaller ones get even smaller, to a point where they might even disappear. Since none of Aspires operators are big ”premium” operators, I think this development is likely to be negative for Aspire. Even if an operator using Aspire gets acquired by a larger operator, it is likely that Aspire will loose this business.

Obviously, if Aspire would keep growing at the current rate and it´s earnings would follow along, it is a screaming buy at this valuation. However, I do have some concerns regarding the sustainability of their growth. From 2015-2017, the company didn´t grow nearly as fast. Revenus grew 1% in 2016 and 8% in 2017, before taking off in 2018 growing 45%, and by my estimates will grow close to 30% in 2019. This is probably very closely tied to the fact that during 2017, the company signed 15 new partnerships and launched 22 new brands (the same partner might have several brands), and followed this up by signing another 8 partners and launching 13 brands in 2018. In 2019, the company has added a net of 4 brands, making the total amount of brands somewhere above 65 spread across 45 partners. Since there is usually a lag from the time of signing a new partnership to recognizing any significant revenue, the deals struck in 2017-2018 seems to have been the major growth driver in revenue for 2018-2019, and the addition of new partnerships seems to have slowed down quite a bit in 2019. As the market is only so big, and there are only so many operators, it seems hard for Aspire to grow nearly as fast in the same markets going forward by adding new operators. Instead, to grow in these markets, they are going to have to grow either by increasing revenue from proprietary and partner brands, or by increasing margins, and as I expanded on earlier, I am not particularly optimistic about either of those things happening, though I might very well be wrong. On the flip side, they are looking to enter markets outside the EU, have signed a deal with 888 to enter the U.S. in New Jersey, and recently acquired gaming aggregator Pariplay in what looks to be a promising deal that should increase revenue with 5-10% in 2020 at higer margins than the core business. It´s not like the company is going to stop growing its revenue completely, but I struggle to make any sort of prediction with a reasonable degree of confidence as to the pace of future growth, and the margins attached to it. It should also be noted that at 7 times earnings growth might not be necessary to justify the price, but the combination of slower growth and potentially lower margins in the future isn´t very appealing.

Finally, the company does seem to end up in disputes with authorities more often than the competitors I follow. During 2019 they were fined twice by the Swedish gambling regulator, the first one relating to a failure to connect with the self-exclusion database Spelpaus, and the second one for breaking bonus rules. They have also been sued by the Swedish Consumer Agency who claims that Aspire Globals proprietary brand Karamba are violating the gambling act when it comes to moderation and use of bonuses and free spins as a marketing tool (Aspire is disputing this claim). To round of the year, the company announced on New Year´s Eve that it had reached a settlement with the Isreali Tax Authority that will have Aspire pay 13.7M€ over tax issues for the fiscal years 2008-2018, effectively wiping out the entire profit for the 2019 fiscal year. The peculiar timing of this announcement does nothing to enhance my faith in company management. As a side note, the cash raised from a bond issuance in 2018 that has inexplicably been sitting on the balance sheet for well over a year now, will now be put to use paying of the settlement.

SUMMARY

To summarize, the main reasons I sold out of Aspire Global are:

  • The business model doesn´t seem to be scaling the way I expected it to.
  • I don´t believe management commentary on why this is.
  • I am uncertain of the long-term durability of the business model when markets gets regulated and stronger brands likely will be favored. This makes it hard for me to predict the future with any kind of confidence.
  • Growth in revenue will likely slow, and margins are already declining so earnings growth might taper off substantially.
  • Lawsuits and disputes with tax authorities combined with a very weird timing of the latest announcement has led me to question the cander of management.

To be clear, it is the combination of the reasons listed above that made me sell out. Had I only held one or two of these concerns, I would have likely kept the stock at its current valuation. There are certainly things I like about Aspire. It´s a consistently profitable capital light business that used to have net cash (before the tax settlement), and by owning Aspire you get some diversification on the operator level compared to owning a single operator. I am trying to dodge a value trap here, but I have to admit that I´m not certain at all that the stock isn´t severely undervalued still, but I just don´t feel confident enough about the company quality and future outlook to bet on it at the moment. I will continue to monitor the company, and should any of my above concerns be settled, I might find myself owning it once again, as I am very attracted to the valuation (normalized for the one-time tax expense).

Lastly, I would like to touch on potential biases affecting my decision to sell. The stock has been doing incredibly poor since I bought it, so there is a risk that I might be overly negative about the future of the company as a consequence of this, rather than relying on what the financials looks like today. It is also possible that I am reading way too much into comments made by management and the timing of the announcement regarding the tax dispute. Biases are very hard to protect against, so it´s very hard for me judge whether I´m biased in my assumptions here or not (ask me again in a year and I will probably have a better idea of whether I was biased in this decision or not), but I did not sell in panic or anything like that. I have pondered the case for a long time, and spoken to several of my investing friends that are very knowledgeable in this sector, and they largely agree with my conclusion. I was leaning towards sell but was taking the holidays to decide, and then the weird announcement regarding the tax dispute happened, which was just enough to push me over the edge.

As always, any feedback on my reasoning and analysis is greatly appreciated!

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