Rush Street Interactive, Inc.

Moat: 1.5/5

Understandability: 2/5

Balance Sheet Health: 3.5/5

Rush Street Interactive, Inc. is a gaming and entertainment company providing online casino and online sports betting in the U.S. and Latin America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

RSI operates within the competitive online gaming and sports betting industry, requiring significant marketing and promotional spending to attract and retain customers. This intense competition makes it difficult for any single player to establish a wide and lasting moat.

RSI’s moat can be characterized as limited due to several factors:

Limited Brand Loyalty: In the online gaming industry, brand loyalty is quite low. Customers frequently switch between platforms based on promotions, odds, and game selections, hindering sustained pricing power. RSI has to constantly attract new and returning customers by offering new bonuses and betting opportunities.
High Competition: The online gambling and betting space is highly competitive. There are numerous established players and new entrants vying for market share. This makes it difficult for RSI to build and maintain sustainable advantages over competitors. Major players in this sector are FanDuel, DraftKings, MGM, Caesars, BetMGM, Penn Entertainment etc.
Imitation and Innovation: While RSI offers a variety of gaming options and promotional incentives, these are relatively easy to replicate by competitors. The technology itself is also becoming more readily available, reducing the barrier to entry for potential disruptors.

RSI, therefore, possesses a narrow moat derived from a combination of factors which have provided them a small differentiation from its peers and have given them a small degree of stability over the years. Its main business strategies can be copied by competitors, and therefore the size of their moat is small.

Legitimate risks that could harm the moat and impact business resilience:

Regulatory Changes: The online gambling industry is highly regulated, and changes in state, local, and federal laws can lead to limitations in jurisdictions where the company can operate and could increase costs significantly. Furthermore, new regulations could prevent new customers from joining and reduce its TAM.
Competition: The online gaming and sports betting industry is highly competitive with many established and well-funded companies. This competition can lead to margin compression, as companies are forced to spend more on marketing and offer more promotional incentives to attract customers. As noted above, a lack of differentiation makes it difficult to build sustainable competitive advantages against competitors in their operations.
Technological Disruptions: The online gaming industry is subject to rapid technological innovation. New technologies or games developed by competitors can cause RSI to lose market share if they do not keep up. This makes the moat subject to continuous investment to maintain their relevance.
Economic Downturn: In an economic downturn, customers may have less money to spend on leisure activities like online gambling. A downturn may also lead to higher default rates or decreased deposit amounts from their customers.
Security Breaches: Companies in the online gaming space are frequent targets of cyber attacks. If they encounter a security breach and customer information is compromised, this could lead to a loss of credibility and customer base.
Customer Retention: The company is reliant on attracting customers to its offerings. A major emphasis on retention is important since there are so many competing platforms that users can switch to with relative ease.
Loss of key employees or third parties: As a company, RSI relies on the expertise of its employees and also needs to form close relationships with third-party providers, these relationships could affect RSI adversely if these people or companies became unavailable to perform their responsibilities.

RSI’s business has some resilience despite these risks:

Proprietary Technology: Though not unique, RSI’s platform is proprietary and not easily copied entirely. They have developed a platform to manage their online casino, online sports betting and retail sports betting.
Geographic Diversification: RSI operates in several markets in North America and Latin America. This diversification may provide them a cushion in case they face regulatory or economic trouble in any single market, because they can rely on others.
Established Presence: Although there is a lot of competition, RSI has a relatively established presence in its operating markets. They do have some name recognition and also a pre-existing customer base that makes them able to compete and maintain some part of their revenue.
Focus on Regulatory Compliance: RSI has taken significant steps to comply with regulations and has a relatively positive relationship with regulatory authorities. They have invested in compliance processes which they hope helps them to operate without having to worry about regulatory issues.

Detailed Business Explanation:

Rush Street Interactive, Inc., a gaming and entertainment company, is primarily an online casino and online sports betting provider in the U.S., Canada, and Latin America. They have a dual presence through both the online channels through their brands such as BetRivers and PlaySugarHouse, as well as in retail locations in areas where gaming is legal, though a significant portion of its overall business comes from online.

Revenue Distribution:

Online Casino: A major source of income. The company’s online casino offerings include virtual slot machines, table games, and other forms of gaming.
Online Sports Betting: The company provides access to betting on sports events. This includes pre-game, live and in-game wagering.
Retail Sports Betting: The company also provides retail locations in areas that allow such activities.

Trends in the Industry:

Growth of Online Gaming: The online gaming industry is rapidly expanding with the introduction of new features, and the ease of access and availability of the internet.
Mobile Gaming: More and more customers are moving to mobile gaming due to convenience and flexibility.
Regulation of Online Gaming: As more jurisdictions legalize online gambling, a bigger and more readily available TAM is expected. However, this also leads to increased compliance costs.
Mergers and Acquisitions: As the online gaming market matures and becomes more competitive, consolidation and acquisition are becoming more frequent.
International Growth: In the recent few years there has been increased focus on growth in the Latin America market, specifically.

Margins RSI’s margins are volatile and vary significantly year over year and quarter over quarter. They can have fluctuations as a result of promotional offers, changing regulation and many other factors that affect the business.

Competitive Landscape:

RSI competes in a very competitive industry that is extremely crowded with other established and emerging companies.
They compete with a variety of companies ranging from small local to larger international ones.
Key competitors include FanDuel, DraftKings, MGM, Caesars, BetMGM, Penn Entertainment, etc.
They face strong competition on marketing spends and also in innovative game and incentive offers.

What Makes RSI Different:

They primarily operate in online markets and so are able to reach a large number of users.
They also operate brick and mortar locations and so are able to provide both online and offline services.
They have been able to grow their international operations in LatAm, specifically with their brands, something which other competitors have not been able to do.
They offer a good variety of games and betting opportunities.

Financials (In-depth):

Revenue Growth: The company has grown in revenues for several years in a row. For the nine months ended September 30, 2023, RSI saw total revenues increase to $571.8 million, an increase of 33.7% as compared to the same period of last year. For 2022 they had generated $488 million in revenues which is a 33.4% growth from the 365 million dollars of revenue that they generated in 2021. The consistent growth is certainly a positive for the company, however, it’s yet to be seen if this can be maintained in the future.
Net Income: RSI has, however, not yet been able to become profitable. They have net losses of $16.8 million and $35.3 million for the nine months ended September 30, 2023, and 2022, respectively. They had net losses of 234 and 227 million in 2021 and 2022, respectively. The lack of profits in such a high-growth industry is a concerning aspect and will need to be looked at in future time.
Gross profit margins: The company’s gross profit margins are around 30-40% which is not very high, considering the potential earnings power for the industry, and is a concern for potential investors. Their gross profit for Q3 of 2023 was 37.7% which was a dip from 40.2% in Q2, showing some volatility in the company’s profitability.
Operating Expenses: They have historically been a heavily operational expenses company and so has not been able to turn a profit. As they expand into new markets, their operating expenses are still significant.
Cash Position: They had $262 million in cash as of September 2023 and so do have the ability to invest and grow into new markets and opportunities.
Key Metrics: They have a high-growth rate combined with a decent return on capital (ROIC) of 12.1% in the last 12 months, which shows that their business model is doing well to generate cash. They also have good gross profit margins but negative profit margins. The company’s debt is not too high relative to the equity, but the negative earnings is a cause for concern and needs to be noted.
Share-Based Compensation: Historically they have had a relatively high share-based compensation expense which dilutes the shares.
Guidance: In the earnings call, management re-affirmed guidance for adjusted revenue between $670 million and $710 million for 2023. They also expect to generate a positive EBITDA in 2024.

Understandability: 2 / 5

The online gaming business model is simple at its core but the many moving parts related to legal jurisdictions, international operations, compliance, technology, and competition can make it difficult for a typical investor to gain a full understanding of the industry and RSI.

Balance Sheet Health: 3.5 / 5

They have a good cash position of about $262 million as of September 2023, providing a liquidity buffer for potential opportunities and also for managing any short-term financial risks
They have a substantial liability with accrued expenses and accounts payable which could be a concern if the company was unable to pay back these amounts in a timely manner.
They also have some long-term debt which could be a risk if interest payments increase.
The company has goodwill and intangibles which reduces assets on the balance sheet. They have started to write down and depreciate their intangibles more regularly, which is a good move. Overall, while the company’s asset-liability equation looks acceptable, there are some elements in their balance sheet that may pose some risk. Also, their high cash burn requires further scrutiny, however.

Recent Concerns/Controversies/Problems Faced:

Competition: As has been discussed before, the company has been facing constant competition which has forced them to increase their ad spends.
Profitability: A major concern that the company has is its inability to generate profits. The losses keep on piling and this needs to be taken care of.
Regulation Changes: The company operates in jurisdictions where the regulatory landscape is volatile and changing. Any changes in these can affect the company’s financial picture.
Technology Adoption: In recent earnings calls management has outlined the need to upgrade their technology infrastructure with new platforms and products. This will mean large capital expenditures are to be expected in coming quarters, and if these improvements are not well received, will hinder the company.
Economic Uncertainty: Given the current global economic situation, it is difficult to predict how consumers will be spending in the near future. So a lot of what RSI can do will be dependent on the consumers, and external factors that they may have little control on.

Management’s Perspective: During the most recent earnings calls, the management seems to be confident that they are on track to grow into new markets, while maintaining and sustaining their overall revenue. They highlighted that their focus is on improving their platform with new features, maintaining and improving their marketing spends, and also complying with local regulations. RSI has outlined a path to profitability and it will be key for them to take the right steps to achieve that profitability while maintaining high revenue growth.

Disclaimer: This analysis is based solely on the provided documents and earnings calls. Investment decisions should be made after conducting a thorough due diligence, considering your personal circumstances, risk tolerance and information from other sources. The information provided here is for informational purposes only and does not constitute financial advice.