Chit Chat Stocks - Evolution Gaming (EVO) | Deep Dive

Episode Date: March 4, 2021

Evolution Gaming provides live casino solutions to gaming operators. Mostly in Europe and North America, Evolution Gaming runs casino tables that are then streamed live so that users can start placing their bets. Brett, Ryan, and Ian analyze the business and dive into the potential of the company. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (1:48) Industry | (6:06) Management & Ownership | (9:00) Valuation | (11:41) Earnings | (12:51) Balance Sheet | (14:58) Our Analysis | (18:45) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday deep dive. Sorry for the hesitation that we're recording on a different day, so our schedules are all messed up, but we're talking Evolution Gaming

today. I'm here with Ian Gray and Ryan Henderson, as always. Guys, how are we doing? Ian, you're heading down to spring break. Exciting to get away from us for a little while, get to the sun. yeah for sure we've been been up in the cold for too long and starting to need to warm up our bones a little bit so i'm going to go try and find some sunshine all right and we're going to be talking uh evolution gaming but before we do ryan do you want to talk about seven investor or should i sure i mean they they still haven't announced that seventh member yet they still haven't we're waiting in high anticipation and we're actually you when we when this comes out it'll be right after the new march picks so perfect time to sign up get ten

off with our code ccm so it's only seven bucks to try it out you can see all their historical picks um i don't know seven picks for seven dollars seems really smart to me yeah i mean they they crush the market so they do they do uh they do a heck of a lot better than uh than we have but you know yeah all right should we get this thing started it's called ccm uh but yeah i'll talk about evolution gaming group uh and if i'm not clear on sort of how the business works just let I mean, no, but basically they develop and then they license live casino solutions to gaming operators. So they have these studios. I guess there's two components to the business.

They have sort of the more traditional games and then they have the live casino solution, which is more. Think about like the Peloton Studios, how there's like those people that are actually riding the bike and they're doing all the production part. And then it's getting streamed to all these different people. that's kind of what the live casino solution is like um and so but evolution gaming is selling to operators like draft kings hard rock casino poker stars pen um and those those companies are the ones that actually interface with the customer so they're the ones that actually uh have the connection to the end user evolution gaming group is just licensing out their service i guess you could call it. I mean, it's not necessarily software exactly. It's like a full on casino

solution. And so the live casino solution, it's like if you logged in, you would get a real dealer dealing real cards, but there's infinite seats essentially at each table. I'm not sure if it's actually infinite seats, but there's more than like five people at a table. Whereas a traditional casino, you only have so many seats. The seats are digital. So you can kind of get a lot more bang for your buck on each table. And then it's actually kind of cool to watch. So you can go to YouTube and watch sort of how this works. But the bets are digital. The dealers are real people. And it's basically in this large studio that they have set up all over the world. They have a bunch of different studios. And there's just a bunch of different tables and

dealing it and it's getting essentially live streamed um and then the operators use an api to sort of embed that live stream into their uh gameplay am i does that kind of all make sense yeah it makes perfect sense okay and then some of the games they have include slots megaball live roulette live poker live blackjack monopoly live which i think that is their proprietary game so that's one that they have that other uh gaming developers came up with right and then they have like deal or no deal they have i believe more than 40 games and they probably do now with they just acquired net ent who is the big uh slots provider for i think more than two billion dollars so they are the biggest um casino solution provider uh in the world uh

Uh, I will, uh, we'll, we'll get to the industry, but I think that is, we have one that's bigger, but in revenue. Yeah. Market cap, I think evolution is the biggest, but. Okay. And then, uh, history, Jens von Barr, uh, first founded evolution in 2006. Cause I think there was actually a co-founder involved there as well. So I might be missing him. Um, but the goal was to revolutionize the European live dealer platform and mobile gaming wasn't actually introduced until 2012 but i think mobile gaming now makes up more than 65 percent of their revenue um and they went public on the nasdaq uh in stockholm in 2015 there was like a different type of exchange they went public on and then they also listed on nasdaq nordic in 2017 um and

they're actually headquartered in latvia um and they employ about 9 500 people those are included in all the studios across Europe and America. I guess, oh, how they make money. So they typically have three-year contracts with the casino operators, but then they also have a 10% take rate on however much the casino makes off the gambler. So if, by the way, there's a really good report out from Alta Fox Capital. They bought it and did like a whole nine-pager on it. And so they go into depth on it. So if the casino ends up taking $10 from the gambler by the end of the night uh evolution gets that one dollar kickback but if the casino loses money to the gambler evolution doesn't lose any money that's just the loss for the casino right yeah that makes sense

kind of favorable economics there but do you want to get into the industry yeah so competitors are going to be mainly in europe we're not seeing many u.s competitors out there there's a lot of you know up and coming um consumer facing brands but on the technology side it's really a lot of European companies. There's Betsson AB in Europe. They have almost a billion dollars in sales from what I saw. There's Leo Vegas, who is a lot smaller. All three of these companies are listed in Sweden, I believe, but I guess Evolution is actually based in Latvia. Playtech has a $1 billion market cap and is actually supposed to be more sales than Evolution Gaming in 2020, I believe. Let me confirm your earnings numbers. Yeah, because it's supposed to be more than a

billion in sales, but it actually has a way smaller market cap of only $1 billion versus what is Evolution at, about $28 billion enterprise value. Betconstruct is another competitor that's UK-based that provides some software as well. They do about $600 million in sales. So you can see it's not a small market. There's quite a few. There's a lot of dollars flowing around this, especially in Europe. The global online gaming market is valued at about $54 billion.

dollars i believe that was in 2019 and it's expected to grow at a 10 kegger over the next i think it was like seven years you got to take those studies with a grain of salt but you can see that you know the u.s is probably a big growth driver european is more mature they kind of have more um i mean if you kind of if you're a u.s investor um you probably know that it's more of a black market you know or at least you know the last few decades it's kind of been a black market online and offline stuff uh outside of you know vegas and um atlantic city but now everything's getting more legalized so that's going to be a big tailwind for the industry um legalized sports betting seems to be hitting an inflection point in the us you know will there be a benefit to

evolution as a collateral right now to betters you know for example penn national has seen a lot of growth from that barstool acquisition and draft kings and fanduel and stuff like that right now evolution if i'm correct does not do sports betting but a lot of the companies they work with are getting a lot of you know surge in customers doing sports betting and then they can come to those you know casino products does that make sense or am i off base there yeah no they uh i mean they are partners with draft kings and and vanduul but just to make sure i clarify it is this is more traditional casino gambling not sports betting it's like i'm playing poker blackjack or roulette and that's it's like you're in a casino not uh not just betting on games yeah

but the thing yeah they don't have that yet i think somebody yeah they could in the future they don't have that as a current product uh but i think a lot of people think that if all these bettors are coming onto these properties to bet on sports eventually they'll move over to some of the the other casino products uh but next we got management so ian you want to take it away yep so as ryan mentioned jens von bar uh is the co-founder uh president former ceo he's also the current chairman of the board but in 2016 this guy named martin carlson took over as ceo uh the stock's almost up almost two thousand percent since he took over so pretty pretty impressive run um you know it had only been public for a little bit before he took over but um if nothing else

he has done a good job. It's no, no shareholders I would imagine are unhappy with him. He talks in interviews about wanting to quote, be the best company in the world. But he also kind of stresses the importance of staying humble. They're not there yet, all this type of stuff, but he really is committed to excellence. And that's something that I'm kind of, I really like hearing CEOs talk about excellence being great and just whether it's operationally or in their vision that they just really want to be the best. And so He seems to have some big dreams, some big vision, and he's been executing on it well so far. So we'll see how it goes from here.

But I'm pretty interested in kind of following the CEO and hearing more from him. There's about 10% insider ownership in the company. Most of that is from members of the board and independent directors, basically. And then about 39% institutional ownership. So quite a bit of ownership by the public out here. And so still some kind of, you know, we might see some more institutions jump in. BlackRock has a small position. Vanguard has a small position.

All the kind of typical names at least have their eye on this one. So something that's on the radar. Right, right. Yeah, I mean, nothing, I don't know. I see nothing crazy on that insider ownership. Seems pretty standard. Yeah, I mean, when management does talk about customer focus and stuff like that, that can always be a good sign. You got to hope they actually execute.

but it seems like Evolution is going out with the growth they've seen. Yeah, and I would also add, so I watched a pretty long, I think it was the CEO, he tried to do one of those Steve Jobs presentations where they have the lights shining down and they always talk really slowly. But he did seem very focused on innovation and kind of not resting on the laurels. I know they have, as far as new games they've released, they've been sort of at the forefront of that.

I think they released 12 in 2019 and then nine in 2018. And they've just like kind of been innovating at a much quicker pace than a lot of these other live casino operators. Yeah. I mean their products, their product launches have been quite impressive. Yeah. Yeah. All right. I'll get into the valuation. Just hit this quick. Ticker in the U S is going to be E V V T Y. If you're going to buy this on the OGC markets, because it is listed in Europe.

Enterprise value is about $27.2 billion at the time of recording, but it's going to be about a week away from when you're listening to this. So the stock's a bit volatile. So make sure to check and update these numbers. EV to sales is about 40. However, their profit margins are really, really strong,

which Ryan will get into next. So their EV to operating income, while still high, isn't insane. It's about 75. And then EV to operating cash flow is similar to that. So 75 is very, very high. But with their profit margins, it shows that they're likely not, you know, they're pretty far off from what they're probably terminal sales multiple will be, but they're not as far as a company that is doing, you know, 40% gross margins when what Ryan, you're getting into the earnings next, they do what's 50% plus profit margins. They do. Yeah. So also if you're seeing, you mentioned the ticker EVVTY, the popular ticker is EVO. So if you're on Twitter, that's what's being referenced. But yeah, as you mentioned,

they are really profitable, probably one of the most profitable businesses I've ever looked at. But so their 2020 revenue was 682 million, up 53% year over year. And Europe accounts for about 60% of that revenue. Asia is like 24% and North America is smaller, but it also doubled year over year because we're seeing it's sort of becoming de-stigmatized in America or at least across the states. And then they had $364.4 million in operating profit that was growing 90% year over year. So their operating margins were about 53% and that's been increasing rather quickly. And a lot of the people that are bullish about the company talk a ton about scalability and the more operators they sign on, it's just, they don't have to add tables to add customers.

So that's kind of the benefit of their scale. Like you can just, as you have more customers, the tables become more valuable. And so yeah, operating margins, 53%, net margins, 51%. That it's up about 90% year over year. And then 51% of that net profit gets paid out in dividends to shareholders. And then they acquired NetEnt, which became effective December 1st for $2.7 billion all in stock, which I don't mind if you're trading at 70 or 80 times operating income, use that stock as currency. And then diluted share count increased 7%, but all that really was attributed to the net end acquisition. If you backed that out, I think it was obviously much lower, but it was not above anywhere like 5%. And then I thought an interesting note here,

they record the value of customer relationships, the value of software and the value of their brand all on the balance sheet. I don't know if that's a formality that they have to do. I didn't ignore that idea, right? Yeah. I don't think they were... I think they're doing it because they have to but i guess you can touch on in balance sheet and liquidity yep so before diving into that i'll i'll hit the high level stuff first so we've got about 270 million uh dollars that's in u.s dollars um you want to check that um i think their currency like their market cap sometimes is listed in uh uh norwegian dollars maybe swedish right swedish i don't know what it's called i thought it was euros on the or no euros on the so it's

on the balance sheet and like their um financial statements and stuff it looks to be euros but i think whatever um like their market cap is listed because i think we said they were in norway um is where they uh listed on the first exchange so anyways you just want to check out the currency stuff because the currencies are a little bit different so anyways in u.s dollars it's 270 million uh dollars in cash um no what i would consider true debt but about 61 million dollars in leases uh so big net cash position um and one interesting note about the leases is this kind of indicates to us that they don't actually own their studios they lease them out which helps keep the model a little bit um less capital intensive they don't have to buy big studios

and all that type of stuff they probably get tenant improvements too and so um don't have to spend a whole lot of money into improving the studios or things of that nature. They probably get some help from their landlords. But anyways, they've got a lot of goodwill, as Ryan just mentioned, related to the acquisitions. About 60% of assets is related to basically this most recent acquisition. So keep an eye on that. If the acquisition doesn't pan out, that can be a hit to earnings, all that type of stuff. But at the rate they're growing and they're excited about the acquisition it should be fine but something to be aware of um as far as the value of customer relationships value of software all the brand and stuff it seems like um sometimes uh these types of

companies especially when they're making big acquisitions they're trying to raise money they'll include stuff like that so that they can get um that basically serves as more collateral for the or not collateral but more um what they would consider real value that they can show to the banks or, uh, be a part of these types of acquisitions, just that there's probably some value there. We don't really care about it as investors in terms of like dollar amounts on the balance sheet, but for people who are more, um, financers and, uh, helping do some of these M&A deals, uh, having some sort of number value on some of those relationships are, uh, you know, it helps get the deals done. Yeah. I guess with our goodwill too, you can tell if they start

writing it down, it's not going to impact the cash they're generating, but it'll show if the net and is it called net end and yeah n-e-t-e-n-t and kind of weird name but uh oh entertainment okay that makes sense but yeah that shows if they're writing goodwill down and show that the acquisition isn't working out like they thought right and it just it shows that it's not working out as they thought and some investors who care more about things like p-e ratios i know that's so old old-fashioned today that'll drag down things like earnings drag down those types of things so um like you said not a cash expense and so it's not um you know not concerning in terms of liquidity or their ability to run their business or anything like that but it can it can spook

investors yeah i appreciate the attempt uh at at devaluing the intangibles but it's i mean it's like impossible to quantify so it feels like they they have to know the customer or in shareholders are like we don't care yeah as an investor i i really just gloss over that stuff it's kind of adjust it either that you just just kind of go just ignore it um but uh yeah that's it for the first half we're gonna take a break and then hit competitive advantages true growth ups and highlights and lowlights cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer

can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back next up we have competitive advantages but during the break we had some ryan wanted to make a point or correction i i i just i was just reminded of this but uh and you touched on the studios part because that's really their lease uh liabilities and i believe i saw somewhere that um in the u.s you have to have the studio the studio has to be in the same state that it's been legalized in i think that's true yeah so um i wouldn't be surprised that they were a little picky in where they chose to lease out studios in the States,

because if they're not going to get a big enough market share in certain States, or it's not going to be worth the ROI, uh, I'm not sure they'd want to open a studio, but anyway, I just thought that was worth going out there. All right. Competitive advantages now, Ian, what do you got? Yep. So I think one of their main competitive advantages is their existing infrastructure of these studios and the employees there the dealers or um whatever type of live employees they have uh many of the the innovative players in this gambling space the sports space or the uh gaming space they're trying to stay pretty asset light and evolution has figured out a way to kind of do that while still um you know by leasing out these facilities but they still have this huge expense

for all the um employees of these places and so it is a bit of a big investment to build out the studio network and like ryan was saying um even further to this point is that it you in the u.s having to um have a studio in the state where you're um where the gaming is happening and where it's legalized actually makes it pretty difficult to build a big network and so just they have a little bit of a head start there on a lot of people so having this existing studio i think provides at least a short-term competitive advantage all right ryan what do you got uh Mine's the proprietary games. So Monopoly Live is one. And then if you go to their investor relations page, they list out all their games. I think they say which ones are proprietary, but

some of Evolution's most popular games belong solely to them. So that Monopoly Live is a really big one. I saw that, I was looking over YouTube videos and a lot of people were sort of fanatic about that one and so that kind of presents a problem for the operators so if penn national gaming has all the maybe they're a bad example but uh if someone's got all these customers that are using that operator to play the online games um and they're big into monopoly live and then whoever that uh operator is decides to switch to a different live casino and they can't offer monopoly live it's really not that hard for a customer to say okay whatever i'll just go to 888 casino or whatever and so that i can play that game like it's i mean you're just it's almost a

commodity service in that regard uh from the operator's side it's really not that hard to churn or switch between apps yeah that is true that is true yeah the monopoly live the only pushback would be that it doesn't seem like and i haven't seen the game doesn't seem like a game that's that easy to build something that's similar but no one really has yet so it's like all right i mean someone could create a copy of plenty of games maybe there's some sort of brand there yeah and there's i would say there's also a lot of them it goes beyond just monopoly live so i think being on the forefront of adding those new proprietary games is going to be big as well yeah that could be that could be um mine i mean i don't know maybe i'm not getting it but i couldn't

find any i thought were that strong i mean the economies of scale makes sense to a point but there are a lot of competitors out there. Maybe evolution just has the best management, the best product offerings, but I don't think that's a competitive advantage. You know, it makes them a good business. Um,

I mean, they probably have high switching costs and the, the scale, you know, the scale thing is there, there is some upfront investment, especially through all the States. I don't know.

There's a lot of, a lot of the bull cases kind of right around the competitive advantages. I didn't really, I don't know. Maybe I need to read more. I really didn't think they were that strong. The business looks great, but I don't know if the fun, like the actual business model gives them anything unique, you know,

because there's a lot of competitors out there. Yeah. But I think the sort of, it's like the cash app, the combination of all the unique features because there are these smaller unique features. They have all the proprietary games. I do think people start to get accustomed to a certain dealer which belong to evolution gaming these a lot of this stuff is what alta fox had on their report as well um and sort of all of those just give more reason for the operator to re-up their contract with evolution

so it's not necessarily always the end user and how they interact with it but how much does the operator need uh evolution i think those kind of combine to make it pretty necessary to use them um well i mean i don't know maybe they have the best offering i don't know it just seems it's not like there's anything i mean it's copyable maybe it's it feels like maybe i'm making like that oh google can just enter that tech you know thing argument so maybe that you know i'm thinking that it's too copyable yeah you know i mean when people are like well google just copy that or facebook will just copy that maybe i'm making that argument too like quickly uh so i could be wrong but in what do you what do you have anything else on competitive advantages i think you're right that there's

some questions about whether they really have strong competitive advantages because like you said there's some pieces of it seem fairly copyable um i think some of the things that ryan's brought up like the relationships with the dealer or um some of those more kind of personalized things but do provide some competitive advantage but i don't think it's this isn't a business i look at and go wow look at this incredible note they have right i think they've got a little bit of a head start but more of a head start than a moat necessarily no it doesn't make it a bad investment or a bad business like their execution has been phenomenal yeah i'd also add that the uh it might be a rising tide that lifts all boats you know the the switch from land

based to online if you're deliberating over moat between one or the other and they they all end up benefiting from that tailwind it might not matter that much yeah true very true uh next up is future growth opportunities and what do you have yep so the way i'm kind of thinking about this is they have this existing uh network of studios and relationships with the uh with the casinos and with these their customers and so with the rise particularly in the u.s of sports gambling seems like they should have the opportunity to do some sort of live sports gambling offerings and that they have this advantage against some of the other players like we talked about fubo a couple months back um the it seems like evolution with all these studios they could do some sort of live

sports gambling shows or be going through like the different types of prop bets that you might see or um talking about you know even jumping between you know the end of games saying live in-game bets kind of being able to like guide people through the experience a little bit because i think one of the things about sports gambling that some people like is kind of that community feel of it And especially with COVID right now, there hasn't been the, you know, you can't go to the, you know, bar in Vegas or the casino and make your live sports bets and all that type of stuff. And so ways to do that virtually, I think is probably an opportunity. And it seems like lots of people are trying to kind of get into that market. And it seems like they have a little bit of an advantage here, having studios and having talent that knows how to engage people digitally.

So anyways, kind of, I don't, I don't know that there's any movement on that front, but it'll be interesting to see if they go in that direction at all. yeah i am it feels like that's a logical next step i'm just curious sort of how that would play out and if there's any friction between them doing that being that they're partnered with a lot of those big sports betting uh companies companies who already have their own apps but they can bring the technology in there if the app right if they could if just like they developed the monopoly live game if they could somehow get some people who were actually well and barstool is doing it kind of like with uh you know personalities like big cad and dave and all sorts of people like if they could actually develop their own personalities

in evolution gaming and license out um their show basically um and whether that and you know you could license it out to these casinos who could then you know include their own betting platform but using their show to kind of drive bets i don't know i think there may be some sort of opportunity there for some live talent yes i was skeptical when we were reading or uh looking into fubo about their claims of getting into sports betting and all that stuff because there's that rights issue and no one's going to fubo when it's kind of a commodity product you really got to have the personalities there but if anyone is going to power the back end of that it seems like it would wait i think it would be evolution gaming instead of fubo although i don't know

if that idea is really that sound in general all right ryan what do you got uh for me it's going be secondhand content and i'm not exactly sure how this would be monetized but it feels a little bit like so there are you i looked up youtube videos of people essentially interacting with the evolution live casinos and it's like these popular gamblers and they have thousands of followers um so a little bit like video gaming in that sense how they can get a big crowd behind their gambling um so whether it's twitch or youtube or i don't know what else people use these days finding a way to maybe monetize that or partnering with them because i feel like that's going to be a big avenue and a place where a lot of people go um i never thought a lot of people

would watch other people play video games but i could see now that i've watched that play out i could see people watching other people gamble yeah it's tough to see how evolution would monetize that but i think they could figure something out yeah do you think that there'd be opportunities for them to do something um kind of like i think what we've seen with skills to like do some of these types of tournaments or if they have these personalities on their platform even if that aspect of it is free is that then they can say look at these big sports gamblers who have these big followings or whatever type of gambling it is and actually run sorts of um live shows of like a little bit of maybe the the new version of like a world series of poker or something like that

right? Instead of all these kind of random poker players, it becomes the people who have these large followings because they're entertaining, because they're good for whatever reason, and that they might be able to become a little bit more of a media company in that sense. I don't know if that's something they're interested in, but it might be one way to monetize that idea. It's interesting. All right, I'll hit mine. I took the easy one. All the daily fantasy and sports betting apps in the US seem to be expanding to casinos, and they're all using evolutions product suite uh fan duels a recent announcement they had in the fall they are getting you whatever they're doing some sort of casino that is going to be an expansion of their

daily fantasy and sports betting app i don't know if it's a separate app i don't know anything about fan duel but that just shows that there should be a continued tailwind in the u.s over the next decade if they can keep providing to these operators because i mean how many sports or sorry how many states have actually like open for sports betting it's got to be less than 10 rent michigan just did right and yeah a lot of people are legalizing but it takes a while to actually get the gambling going i know evolution mentioned that they were going to build or lease out a suite in michigan i don't know if that stalled out but uh yeah you're right i'm just wondering if how useful it is because it kind of diminishes the roi per table if you have to build

or if you have to lease out a studio in every state but like if it's a big state yeah a big metropolitan area if it's worth it you know i'm sure vegas is a pretty big market or something you know nevada stuff like that so most states yeah yeah i guess maybe if the market share is there then why not but yeah all right uh anything else on future growth opportunities or should we hit highlights on all that okay ian what do you what do you like what do you not like about evolution yeah so i like the ceo i like uh that the industry seems to be moving in the right direction, should be double digit CAGR growth for the next few years, particularly in the US. Potentially a little bit of insulation from competitors, just based on the fact that

they do have these studios, they have a little bit of expertise, like we've talked about, probably not a super strong competitive advantage, but at least a head start against some people. For the low lights, I kind of worry, I wonder, are some of these big casino operators going to take market share by doing it all in-house. They have all these huge existing facilities. It seems like it wouldn't be that hard to start building out some studios within those facilities. And they already have relationships with dealers that they could find their best dealers and start doing digital tables. So I'm a little bit worried about that. And then also the regulatory environment. This depends on these trends moving the right direction in the US. And if something

were to happen, I don't know what it'd be. It seems like it's an unstoppable train. But you are at a little bit of regulatory risk that things don't play out exactly as the market's anticipating here i'll tell a story uh some anecdotal evidence that i don't know if this will make this will probably make people bullish on evolution gaming but i was with friends and we were doing i i assume it was powered by evolution uh they had some online web thing i'll say as a value investor i wasn't playing uh because i would violate uh whatever what state what state was well they were in washington but they were using like a vpn or whatever i won't use their i won't say who it is to get them in trouble but uh yeah so they're

the roulette thing that's powered by these you know video whatever it's kind of live it's not just the digital click a button and see it it is a lot better uh but man was it highly addictive for these people and they were losing a lot of money which is going to evolution gaming but we can i think we need to be reminded of robin hood uh who is getting into trouble for doing something similar it's a sin stock you could categorize it as a sin stock yeah i'm not sure whether evolution will get in trouble because they're just the back end uh i don't know and then what another thing with ian's point i do think that you know people might get like a big casino like what mgm or something might get uh complaining and say like why are we giving 10

evolution but if the product's good enough i don't know but yeah ryan you want to hit your highlights on the website yeah i think uh the more that i read up on it the more scalable the business felt um they do i mean they do have and i know this was also from that alta fox report but uh they have sort of that netflix effect where when they introduce new games because of all the players that they have those new games become more fruitful and it's more it's worth the innovation um and then also the the fact that they're not confined to the typical table parameters of a traditional casino and then there's also just the big sort of macro industry tailwind of land-based switching to online um so all those are kind of my highlights

and then low lights for me you're right i'm not sure how much the studio is the studio aspect is copyable um and then yeah i guess potentially regular regulatory problems i don't know i didn't have that many low lights i guess sin stock the fact that maybe it's not great to encourage everyone to gamble and it's making it really really easy yeah it's using like it's using like the facebook level you know tricks to get people to i'll tell you i won't say the amount of money people are losing i'm telling you these people are age broke losing too much money and like i don't know about that ends well so yeah but it's uh that's money it's an inevitability right i mean people gamble all the time everyone's always gambled that's the way and i'd say i'd be

i'm fine like i know complaints but when it's facebook like stuff and it has that you know manipulation aspect people do not like that regulators don't like that at all yeah i guess The only thing evolution is changing is the barriers of you don't have to go to the casino in order to throw your money out. It just gets a little easier on your mobile phone. Yeah, I guess it's not that much different than a regular casino. It's really not. So those have lasted forever. What about you?

I mean, I don't know. Margins are great. Management cares about the correct margins. They're talking about cash flow and stuff like that and operating margins, which we like. the returning capital shareholders although at this valuation that dividend returns you know aren't that meaningful um and the value proposition is there for their customers and the huge tailwind in the u.s should continue you know it feels a bit like a picks and shovels play as many consumers seem to be entering this crowded space i wouldn't want to bet on any you know

fanduel draft kings pen whoever all those caesars mgm i don't think i would have any idea who's to win that but evolution if they're powering all these people that i mean they're gonna you know basically be a monopoly in that uh low lights the only questions i kind of had were was 2020 an artificially strong operating environment because of covid and was the land grab with all these digital casinos sustainable i don't know yeah it's definitely a question where yeah the covid bump is definitely a question worth asking because how eager are some of these people to get back into the casino. Yeah. I mean, that could potentially hurt them for sure. Yeah. Um, but I was, yeah, on the margins part, I think they said they, uh, I think I saw somewhere that they wanted

70% EBITDA margins. That was their goal. Well, I think that's, we say sin stocks, that's just as good as chewing tobacco, chewing tobacco is at 72%. So there'll be a competition between who can have better ones in, in anything else on highlights. Yeah. I was just going to mention one last thing. If you look at their returns on equity historically and the returns on capital and returns on assets everything is super high returns they do a good job of really um you know they're in the double digits at time you know before they made this acquisition they were up at i think 60 returns on capital so um pretty incredible stuff so definitely a stock that they're focused on generating shareholder value yeah the yeah and the more i think about the

the casino comparison where i was kind of afraid of the regulators um i can already hear people that are evolution bulls saying like i don't understand how that works because it's the same as a casino but you have to ask yourself what regulators care about you know like there's a reason they're not going after casinos in las vegas and they're going after robin hood and facebook because it looks good politically you have to ask yourself do these you know online casinos are they going to go through the same thing but it is the uh it's the casinos it's the operators that have to that endure that regulatory scrutiny and not the back end yeah Well, if FanDuel gets shut down, I mean, they're not going to get, if FanDuel's whatever, like little part, if they get into trouble, that's, you know, Evolution's not getting that take rate.

Yeah. Yeah. Evolution's brand probably won't come to the forefront. Right. The casinos are sort of the face of the problem. Yeah. But yeah, more or less interested. Ian, yeah, you can go first.

What do you think? I'll say I'm equally as interested. I, we've been talking about the send stock aspect earlier and I, I tend to stay away from things that I feel like are making money off of other people's mistakes. Now that's obviously a gray area and you could probably argue, um, that some of the stocks in my portfolio were really making money off people's mistakes as well. Even, you know, buying the latest version of the iPhone or things like that. But I think this is an opportunity, this is a situation like you're describing with these guys, you know, um, people can lose a lot of money really fast. They can't

really afford to lose money. And it makes me a little uncomfortable to be profiting off of a stock that's doing that. That being said, I think this company has a really intriguing and compelling business model and having that take rate, not the downside exposure of the casinos. And I think it's a compelling business, but just not a space that I'm interested in. All right, Ryan? Yeah, I think most people could probably tell I am optimistic about it. The economics of the business are really exciting to not have the downside, but to have that upside and to have that take rate along with the three-year contracts, it's exciting to me. And there's obviously the

tailwind behind it. So I'm just going to leave it at that. I'm optimistic. I like it. More interested. Yeah. I'd say I'm more interested. Business model looks great. I was pushing back just to kind of get some of the, what do they call that? What's that? I'm losing the term. I don't know. Just internally scrutinized. yeah just to scrutinize just to scrutinize for the show but the business model is fantastic i'm not afraid of investing in sin stocks if anyone listens to the show they know that we own altria group so that's not a concern i would just because you know no one's going after cigarette makers they go after like vaping operators if that's kind of the comparison you want to make

but valuation is concerned me yeah and the valuation is you know sales multiples aren't made equal when you have obviously so when you don't take the sales multiple at face value 39 times sales when they if they ever get to 70 margins is a lot better than some of the other ones at 40 times sales yeah but you have to think i mean what are they going to trade i don't know 15 17 times sales still a lot of growth pricing and maturity and i just i don't know there's a lot more research you probably have to do before investing a lot checks out probably have to watch management a bit but i'm definitely definitely more interested it. Okay. That's going to do it. Ian, you have anything else?

Nope. All right. Well, we got the stock for next week. It's my turn and we are going to be doing Revolve Group. Favorite one of mine. The stock's actually been on fire lately. So we all know that stocks that have gone up recently do better. We get more listens on, so we're going to hack it that way. But it's an interesting company. It's kind of like an online Macy's in a way. They sell like fashion apparel to mainly women and uh like millennial women so okay all right that's gonna do it for this episode make sure to use our promo code ccm at checkout to get ten dollars off your first month at seven investing remember ryan and i are general partners at arch capital arch capital may hold securities discussed on this podcast we are not financial advisors anything we say on the

show is not formal advice or recommendation thank you all for listening we'll see you on our next episode. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.