Lottery.com (LTRY): Not Just Another Overvalued deSPAC

Haven't really seen much talk about this recent deSPAC, and a lot of what I do see gets a lot of basic facts about it wrong. Figured I'd take the initiative and finally contribute something to this community that I spend so much time lurking in and write something up since I've been following this company very closely for almost a year now. Full disclosure: I do have a position in LTRY warrants, and have since I started following them in March 2021. Disclaimer: I am not a financial advisor, this is all my opinion and not financial advice, all users should complete their own due diligence. Summary Stock price is now at $5.51, down from over $15, despite positive (profitable) Q3 results and an average analyst rating of $15.50. Company posted revenue growth of over 1900% from Q3 2020 to Q3 2021, and recently guided to meet or exceed FY2021 revenue targets outlined in first investor presentation post-DA over a year ago Innovative, profitable, and extremely high growth, yet trading at ~4 price to 2021 expected sales ratio, or ~7 P/E ratio if you annualize Q3 2021 net income Multiple catalysts and avenues for continuing current hyper-growth including: increased market penetration, lottery industry growth, international sports betting, and company run global progressive jackpot game on new blockchain based platform Background Lottery.com has operated since 2016 with the goal of bringing state-run lottery games to your phone in a compliant way (think PowerBall and MegaMillions). Starting in the state of Texas, they have since expanded to selling tickets in 12+ states as well as internationally. They went public via a SPAC merger in November 2021, raising over $60 million in gross proceeds, and now trade under the symbol LTRY. Source Their listing has without question been rocky thus far, reaching a low of $4.61 in recent weeks after peaking at $17.50 immediately after the completion of the merger just two months ago. At first glance, it is easy to dismiss them as yet another young company getting in on the SPAC craze with lofty goals that lack substance, but in my opinion, the evidence paints another picture. I'll reference several slides from the November 2021 investor presentation here, here's a link to that if you want more information. Core Business The first thing to understand about Lottery.com is how their core business operates. Lottery.com does not intend to disrupt the lottery industry, they aim to advance it. They often describe themselves as the “DoorDash” for state-run games of chance. What this means is, states get the full price for sales of lottery tickets through the Lottery.com app, the company makes money by charging a convenience fee in addition to the price of the ticket. This point is crucial, as in this arrangement, Lottery.com’s platform is complimentary to the existing system. As such, states have an incentive to partner with Lottery.com to easily bring their lottery online. States can create their own digital lottery systems (and some have), but this requires a lot of time and money to pass appropriate laws, obtain funding for development, and maintain such a system, so the courier model is very compelling: A high level summary of Lottery.com's business model Getting into the financials, Lottery.com posted their first audited, quarterly earnings as a publicly listed company in Q3 2021, and the numbers are very impressive: Lottery.com's Q3 financial results In case you glanced over that, they posted 1912% same quarter YoY revenue growth, a quarterly net income of $11.2 million on $32.2 million in revenue, and did so with a gross margin of 63%. They also reiterated their previously stated FY2021 guidance, saying they “expect to meet or exceed 2021 revenue guidance of $71 million.” Source These numbers, as impressive as they are, do not even paint the whole picture. Take this slide from their most recent investor presentation: Selected user metrics for Lottery.com They currently spend about $4 to acquire a user, and then extract on average $24 from them within just the first year, all while retaining almost 70% of them on an annual basis. And that is just the lower margin, US lottery player. They also have a very sizable runway to continue this exponential growth if they execute, as all of these numbers are while operating within only a handful of states and countries, with only a slice of total customers within those jurisdictions: Graphic comparing online penetration in various industries This sort of hyper growth, coupled with low customer acquisition cost, high margins, and a massive untapped market, is unlike almost any other company you will come across. Misinformation Given all of this, why has the stock price been so beaten down? This is an impossible question to answer. This stock belongs to a lot of categories that are currently not doing too hot: gambling stocks, small caps, deSPACs, so the overall market dynamics probably have a role to play. At least one other contributor is likely the S1 filing that shortly followed the merger, which was publicized incorrectly on a platform I'm not allowed to link to here. As you SPAC veterans probably already know, the S1 filing referred to was not a typical S1 filing indicating a new share offering, and did not result in any dilution to shareholders. Nevertheless, around the time the S1 was filed, rumors of dilution spread, and I still encounter people referencing this "stock offering" as justification for the share price plummeting even today. For those who don't know, the filing was a standard filing made by all deSPACs following merger to register the already existing shares. This fact was confirmed by the CEO himself on Twitter. Upcoming Catalysts Beyond the large opportunity for expansion in the core business via bringing more states online and further market penetration in current jurisdictions, there are also many other significant catalysts for even further growth. The first, most direct one, is that the lottery itself as a market is growing: Growth projections for global lottery and online lottery markets In an effort to penetrate the entirety of this available market, not just the US market, Lottery.com has already finalized several international partnerships, including one to expand into Europe and another to expand into Turkey. They have also done some M&A to accelerate expansion into Mexico and South America, which leads into the next potential growth segment. Sports Betting Another vertical Lottery.com has signaled they intend to compete in is sports betting. They have already acquired the domain name Sports.com to host whatever platform they intend to build for this purpose. Source Though sports betting might seem unrelated at first, the company has mentioned their intention to leverage the current lottery platform to cross-sell sports betting services to existing customers as a way to lower customer acquisition costs, with the thesis that lottery players are a demographic likely to be interested in sports betting. Oh, they also have Jason Robbins, CEO of DraftKings, as an early investor and strategic adviser to help with this effort: Selected early investors and strategic advisors to Lottery.com Project Nexus Perhaps an even bigger area for expansion than sports betting is the recently announced Project Nexus. Details on this are still coming out, but CEO Tony DiMatteo has said the intention of Project Nexus is to build a blockchain-based platform that any company can leverage for creating compliant, trusted games of chance, complete with support for payments and payouts in any form of currency (fiat or crypto). Source: Project Nexus announcement Source: Intent to license use of platform to other companies He has also said development is well underway, and that a global, progressive jackpot game (similar to PowerBall), run by Lottery.com on this platform could come as soon as Q2 2022. Though it is still unclear what blockchain will be used for this platform, the company does already have a partnership with Voyager, so it seems likely that they plan to leverage this partnership for handling payments. Valuation The numbers and catalysts are impressive, but they do not mean much if the current valuation of the company is too high. LTRY as of my writing this trades at $5.51 per share, which implies a market cap of ~$278 million. Given their 2021 revenue guidance, which was recently reiterated, this implies a current prices/2021 sales of ~4x. If they continue at their current pace of growth, their annual revenue would overtake their market cap within the next year. There’s no need to speculate about what a reasonable price/sales ratio should be though. Remember, as of Q3 2021 they are and intend to remain profitable. Using their Q3 2021 net income of $11.2 million, if we were to annualize these earnings, this would imply a current P/E ratio well under 10, for a high growth, high margin, highly scalable, emerging tech company. For arguments sake, assume none of the catalysts pan out and they really do only match their Q3 net income each quarter for 2022. This would imply a FY2022 net income of $44.8 million. At even a very low P/E ratio of 10, this would imply a market cap of $448 million, or a stock price of ~$8.90, over 60% above the current stock price. If we give them a more realistic, but still conservative P/E ratio for a high growth, high margin, profitable tech company of 30, this implies a stock price of $26.70. Now consider what it would be if they were to continue their historical growth for another year AND trade at a more industry standard P/E ratio. Now consider what it would be if in addition to that, either of Sports.com or Project Nexus have legs. Analyst Coverage Don’t just take my word for it, Lottery.com currently has an average analyst price target of $15.50 with two ratings, representing an over 180% upside: Chardan, $14 PT, Buy Rating Northland Capital Markets, $17 PT, Outperform Rating Conclusion There are a lot of things I did not cover here (I've spent too much time on this already), the biggest in my mind of which is competition. Briefly, there is competition in this space, the largest of which is JackPocket, but in my opinion the market is more than large enough to bear some healthy competition. It also doesn't hurt to have the brand Lottery.com going into that fight. Hopefully I could convince you that this company is not yet another pre-revenue or extremely overvalued company that often plagues the SPAC world, but rather a profitable young company that has thus far met its explosive growth projections and has true homerun potential, especially getting in as low as you can now.

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Lottery.com (LTRY): Not Just Another Overvalued deSPAC

bullish

Haven't really seen much talk about this recent deSPAC, and a lot of what I do see gets a lot of basic facts about it wrong. Figured I'd take the initiative and finally contribute something to this community that I spend so much time lurking in and write something up since I've been following this company very closely for almost a year now.

Full disclosure: I do have a position in LTRY warrants, and have since I started following them in March 2021.

Disclaimer: I am not a financial advisor, this is all my opinion and not financial advice, all users should complete their own due diligence.

Summary

  • Stock price is now at $5.51, down from over $15, despite positive (profitable) Q3 results and an average analyst rating of $15.50.
  • Company posted revenue growth of over 1900% from Q3 2020 to Q3 2021, and recently guided to meet or exceed FY2021 revenue targets outlined in first investor presentation post-DA over a year ago
  • Innovative, profitable, and extremely high growth, yet trading at ~4 price to 2021 expected sales ratio, or ~7 P/E ratio if you annualize Q3 2021 net income
  • Multiple catalysts and avenues for continuing current hyper-growth including: increased market penetration, lottery industry growth, international sports betting, and company run global progressive jackpot game on new blockchain based platform

Background

Lottery.com has operated since 2016 with the goal of bringing state-run lottery games to your phone in a compliant way (think PowerBall and MegaMillions). Starting in the state of Texas, they have since expanded to selling tickets in 12+ states as well as internationally. They went public via a SPAC merger in November 2021, raising over $60 million in gross proceeds, and now trade under the symbol LTRY.

Source

Their listing has without question been rocky thus far, reaching a low of $4.61 in recent weeks after peaking at $17.50 immediately after the completion of the merger just two months ago. At first glance, it is easy to dismiss them as yet another young company getting in on the SPAC craze with lofty goals that lack substance, but in my opinion, the evidence paints another picture.

I'll reference several slides from the November 2021 investor presentation here, here's a link to that if you want more information.

Core Business

The first thing to understand about Lottery.com is how their core business operates. Lottery.com does not intend to disrupt the lottery industry, they aim to advance it. They often describe themselves as the “DoorDash” for state-run games of chance. What this means is, states get the full price for sales of lottery tickets through the Lottery.com app, the company makes money by charging a convenience fee in addition to the price of the ticket.

This point is crucial, as in this arrangement, Lottery.com's platform is complimentary to the existing system. As such, states have an incentive to partner with Lottery.com to easily bring their lottery online. States can create their own digital lottery systems (and some have), but this requires a lot of time and money to pass appropriate laws, obtain funding for development, and maintain such a system, so the courier model is very compelling:

A high level summary of Lottery.com's business model

Getting into the financials, Lottery.com posted their first audited, quarterly earnings as a publicly listed company in Q3 2021, and the numbers are very impressive:

Lottery.com's Q3 financial results

In case you glanced over that, they posted 1912% same quarter YoY revenue growth, a quarterly net income of $11.2 million on $32.2 million in revenue, and did so with a gross margin of 63%. They also reiterated their previously stated FY2021 guidance, saying they “expect to meet or exceed 2021 revenue guidance of $71 million.”

Source

These numbers, as impressive as they are, do not even paint the whole picture. Take this slide from their most recent investor presentation:

Selected user metrics for Lottery.com

They currently spend about $4 to acquire a user, and then extract on average $24 from them within just the first year, all while retaining almost 70% of them on an annual basis. And that is just the lower margin, US lottery player.

They also have a very sizable runway to continue this exponential growth if they execute, as all of these numbers are while operating within only a handful of states and countries, with only a slice of total customers within those jurisdictions:

Graphic comparing online penetration in various industries

This sort of hyper growth, coupled with low customer acquisition cost, high margins, and a massive untapped market, is unlike almost any other company you will come across.

Misinformation

Given all of this, why has the stock price been so beaten down? This is an impossible question to answer. This stock belongs to a lot of categories that are currently not doing too hot: gambling stocks, small caps, deSPACs, so the overall market dynamics probably have a role to play. At least one other contributor is likely the S1 filing that shortly followed the merger, which was publicized incorrectly on a platform I'm not allowed to link to here.

As you SPAC veterans probably already know, the S1 filing referred to was not a typical S1 filing indicating a new share offering, and did not result in any dilution to shareholders. Nevertheless, around the time the S1 was filed, rumors of dilution spread, and I still encounter people referencing this "stock offering" as justification for the share price plummeting even today. For those who don't know, the filing was a standard filing made by all deSPACs following merger to register the already existing shares. This fact was confirmed by the CEO himself on Twitter.

Upcoming Catalysts

Beyond the large opportunity for expansion in the core business via bringing more states online and further market penetration in current jurisdictions, there are also many other significant catalysts for even further growth. The first, most direct one, is that the lottery itself as a market is growing:

Growth projections for global lottery and online lottery markets

In an effort to penetrate the entirety of this available market, not just the US market, Lottery.com has already finalized several international partnerships, including one to expand into Europe and another to expand into Turkey. They have also done some M&A to accelerate expansion into Mexico and South America, which leads into the next potential growth segment.

Sports Betting

Another vertical Lottery.com has signaled they intend to compete in is sports betting. They have already acquired the domain name Sports.com to host whatever platform they intend to build for this purpose.

Source

Though sports betting might seem unrelated at first, the company has mentioned their intention to leverage the current lottery platform to cross-sell sports betting services to existing customers as a way to lower customer acquisition costs, with the thesis that lottery players are a demographic likely to be interested in sports betting.

Oh, they also have Jason Robbins, CEO of DraftKings, as an early investor and strategic adviser to help with this effort:

Selected early investors and strategic advisors to Lottery.com

Project Nexus

Perhaps an even bigger area for expansion than sports betting is the recently announced Project Nexus. Details on this are still coming out, but CEO Tony DiMatteo has said the intention of Project Nexus is to build a blockchain-based platform that any company can leverage for creating compliant, trusted games of chance, complete with support for payments and payouts in any form of currency (fiat or crypto).

Source: Project Nexus announcement

Source: Intent to license use of platform to other companies

He has also said development is well underway, and that a global, progressive jackpot game (similar to PowerBall), run by Lottery.com on this platform could come as soon as Q2 2022.

Though it is still unclear what blockchain will be used for this platform, the company does already have a partnership with Voyager, so it seems likely that they plan to leverage this partnership for handling payments.

Valuation

The numbers and catalysts are impressive, but they do not mean much if the current valuation of the company is too high.

LTRY as of my writing this trades at $5.51 per share, which implies a market cap of ~$278 million. Given their 2021 revenue guidance, which was recently reiterated, this implies a current prices/2021 sales of ~4x. If they continue at their current pace of growth, their annual revenue would overtake their market cap within the next year.

There's no need to speculate about what a reasonable price/sales ratio should be though. Remember, as of Q3 2021 they are and intend to remain profitable. Using their Q3 2021 net income of $11.2 million, if we were to annualize these earnings, this would imply a current P/E ratio well under 10, for a high growth, high margin, highly scalable, emerging tech company.

For arguments sake, assume none of the catalysts pan out and they really do only match their Q3 net income each quarter for 2022. This would imply a FY2022 net income of $44.8 million. At even a very low P/E ratio of 10, this would imply a market cap of $448 million, or a stock price of ~$8.90, over 60% above the current stock price.

If we give them a more realistic, but still conservative P/E ratio for a high growth, high margin, profitable tech company of 30, this implies a stock price of $26.70.

Now consider what it would be if they were to continue their historical growth for another year AND trade at a more industry standard P/E ratio. Now consider what it would be if in addition to that, either of Sports.com or Project Nexus have legs.

Analyst Coverage

Don't just take my word for it, Lottery.com currently has an average analyst price target of $15.50 with two ratings, representing an over 180% upside:

Conclusion

There are a lot of things I did not cover here (I've spent too much time on this already), the biggest in my mind of which is competition. Briefly, there is competition in this space, the largest of which is JackPocket, but in my opinion the market is more than large enough to bear some healthy competition. It also doesn't hurt to have the brand Lottery.com going into that fight.

Hopefully I could convince you that this company is not yet another pre-revenue or extremely overvalued company that often plagues the SPAC world, but rather a profitable young company that has thus far met its explosive growth projections and has true homerun potential, especially getting in as low as you can now.

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7/ 10
Confidence
6-12 Months
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