Sportradar (NASDAQ:SRAD) is faltering mightily today after Morgan Stanley downgraded the sports betting data provider, citing ongoing weakness for many domestic gaming equities.
In a note to clients, Morgan Stanley analyst Thomas Allen downgrades Sportradar to “equal weight” from “overweight,” with a $19 price target.
That implies upside of about 29 percent from the Jan. 14 close. Still, Allen mentions waning enthusiasm among investors for some sports betting equities due to valuation, noting Sportradar rivals DraftKings (NASDAQ:DKNG) and Genius Sports (NYSE:GENI) are in the same boat.
We see SRAD’s two main comp sets as the other Sports Betting technology stocks and comparable growth/margins SaaS stocks (Anaplan, Tenable, Zendesk),” said the the analyst.
“Saas” is a software as a service, which is a segment of the cloud computing industry.
While that’s a comparison sports betting data providers may yearn for, the current market climate is proving hostile to some growth stocks. With the Federal Reserve likely to hike interest rates multiple times this year, emerging technology stocks are being pinched, owing to their longer-term cash flows. For example, the ISE CTA Cloud Computing Index is lower by 8.49 percent year-to-date.
Valuation Coming Home to Roost
On the back of the Morgan Stanley report, Sportradar stock is down 8.53 percent in midday trading, hovering just above $14. That’s far below the initial public offering (IPO) price of $27. The Switzerland-based company went public last September.
While Sportradar, Genius, and DraftKings trade at discounts relative to the SaaS universe, Morgan Stanley’s Allen argues those discounts are warranted due to the costs of procuring deals with major sports leagues. For example, Sportradar gave up equity to the NBA and NHL to win or extend data deals with those leagues, while rival Genius has a similar arrangement with the NFL.
“The SaaS comps trade at ~7x, which we believe SRAD should trade at a discount to, given the concerns around sports rights cost inflation,” said the analyst.
Sportradar provides data on over 80 sports across 150 leagues in 120 countries, and its league relationships include Germany’s Bundesliga, FIFA, Major League Baseball (MLB), the NBA, NASCAR, NHL, and the WNBA, among others.
Rates Could Be Problem for Sportradar Stock
The thesis on Sportradar and rival Genius Sports largely revolves around the growth of the regulated global sports wagering market. It envisions sportsbook operators paying up for premium data, and the ability of these companies to adequately wring profits from league data accords.
Analysts believe Sportradar will deliver robust revenue growth over the next couple of years. But against the backdrop of rising interest rates, investors are likely to prioritize EBITDA growth and profitability.
“SRAD trades at ~22x/~18x/~15x our 2023-25e EBITDA, which we believe properly reflects its strong growth, but does provide risk in a rising interest rate environment,” said Morgan Stanley’s Allen.
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