Could Jumbo Interactive (ASX:JIN) deliver growth living up to its name?

Jumbo Interactive (ASX:JIN) is a lotteries retailer and a provider of a SaaS platform that helps government and charity lottery operators do business. There are several things to like about this company including that it is founder-led, profitable, has a track record of growth and a significant untapped market segment.

Jumbo Interactive has a track record of growth

Jumbo Interactive has a long history, starting out in 1995 as a builder and seller of website design services. One of its clients was an online lotteries provider and Jumbo, seeing the growth in online lotteries, bought a company that sold Oz Lotto and Powerball tickets online.  

Fast forward to 2024 and Jumbo has over 2 million players from Australia and abroad.  It has a white-label SaaS platform for other lotteries around the world to utilise and grow their lotteries, particularly in the US and the UK.

Founder Mike Veverka has remained at the helm since its inception and retains a 14.1% stake in the company. And with only 36% of lotteries having gone digital, there is more opportunity for Jumbo to capture at home and abroad. On top of all this, it has a resale agreement with gambling giant Tabcorp.  

A difficult period during the pandemic

Unlike many tech stocks, Jumbo has not recovered to its pre-Corona Crash highs of $27. Admittedly it is well up from the $8.35 low at the bottom of the crash and has gained 25% in the last 12 months.

Jumbo Interactive (ASX:JIN) share price chart, log scale (Source: TradingView)

A significant challenge that Jumbo Interactive has endured, even prior to the pandemic, has been compressed margins and subsequent investor reaction to the shock. The reason for this is increased business development, merchant and marketing costs for its SaaS business, and the lack of revenue from the SaaS business to make up for the increased costs. Acquisitions of Gatherwell in the UK and Stride in Canada also have taken longer to reap revenues than expected.

Notwithstanding that the Tabcorp deal was good news, it included new fees that effectively halved the 9.3% commission it received from Jumbo and saw Tabcorp sell its stake in the company less than a year later.  

There has also arguably been concern about its exposure to gambling, a no-go zone for ESG investors. However, it has increasing exposure to charities and causes that run lotteries. And furthermore, it has not exposure to ‘pokies’, it is exposed to government-run lotteries.

Good FY22 and 1HY23 results

Despite the underperforming share price, Jumbo Interactive has delivered good results. Between 2018 and 2023, the company grew its revenues from $40m to $130m and its EBITDA by a CAGR of 25%. This is not just because it has been employed by an increasing number of lotteries and charities, but also because lottery prizes have gotten bigger and bigger. Did you hear that Powerball reached $200m? And there were over 16 large jackpots in the first 4 months of CY24 alone.

Jumbo’s last update came at the Macquarie Conference in early May 2024. Its Total Transaction Value (TTV) in the first 10 months of FY24 came in 22% higher than FY23, at $444.6m, while revenues were 38% higher, at $100.5m. 

So far as full year guidance is concerned, Jumbo did not give specific revenue guidance, but hinted it would be mid to high single digit growth. It reminded investors the TLC service fee it receives from subscribers would be 4.65% of the subscription price of tickets, up from 3.5% in FY23. And the EBITDA margin would be 48-50%. Consensus estimates for FY25 suggest 7% revenue growth from FY24 consensus ($167.3m) and 16% profit growth ($49.1m). Jumbo is trading at 12.7x EV/EBITDA, 22.2x P/E and 1.3x PEG for FY25.

Risks associated with Jumbo Interactive

We think the key risks with this company are changes in regulation, slower than expected growth, compressed margins, and cyber-attacks. Investors should be particularly wary of the latter two, margins because this has impacted the company’s share price before, and cyber attacks because there have been plenty of high-profile examples recently.

We are not overly concerned about the macroeconomic environment impacting the company, as it has not in the past. In fact, Canadian and Irish research has found that people experiencing financial difficulties are more likely to buy lotteries and scratch tickets.  

Jumbo Interactive could be a good opportunity

We think there are two types of investors who should stay clear of Jumbo. The first group is ESG investors, because they despise gambling companies. The second group is dividend-oriented investors, given the low payout ratio and yield.  

For growth-oriented investors, however, we think this is a stock with significant upside potential. As we mentioned above, we think there is an opportunity for Jumbo to capture as lotteries go digital. We are encouraged that unlike other stocks that benefited from the shift to online activities during the pandemic, momentum held up as the economy re-opened, and there’s still more growth to come.  

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