International Expansion And AI-Powered Features Will Drive Future Success

Key Takeaways

• Strategic digital transformation in key markets is expected to enhance revenue, improve margins, and engage customers more effectively.
  
• Expanding international operations and innovative partnerships bolster long-term growth potential through diversification and improved margins.
  
• Failed UK acquisition highlights challenges in growth via M&A, while rising costs and potential revenue volatility pose risks to margins and earnings.

Catalysts

Engages in the retail of lottery tickets through internet and mobile devices in Australia, the United Kingdom, Canada, Fiji, and internationally.

• The pricing and product changes implemented in Lottery Retailing in May '23 contributed significantly to revenue growth, indicating this strategy could continue to boost future revenues.
  
• Digital transformation in the U.K. and Canada is expected to drive growth, potentially enhancing revenue and improving margins as digital channels generally offer better customer engagement and cost efficiencies.
  
• The new debt facility provides incremental flexibility and liquidity, supporting growth strategies including acquisitions, which could positively impact net earnings and drive future expansion.
  
• The growth in new players and active players alongside increased average revenue per player suggests strong future earnings potential as customer base and spending habits align favourably.
  
• The company's focus on expanding international operations and uncovering new revenue opportunities (e.g., SaaS partnerships, AI-powered features) can drive long-term revenue growth and enhance margins through diversification and innovation.

Jumbo Interactive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jumbo Interactive's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.2% today to 28.8% in 3 years time.
• Analysts expect earnings to reach A$52.2 million (and earnings per share of A$0.82) by about February 2028, up from A$43.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$59.6 million in earnings, and the most bearish expecting A$46 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 19.4x today. This future PE is lower than the current PE for the AU Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Jumbo Interactive Future Earnings Per Share Growth

Risks

• The failed acquisition attempt in the UK suggests potential challenges in expanding through mergers and acquisitions, which may limit future growth opportunities and impact revenue projections negatively.
  
• The 76% increase in marketing costs, which may put pressure on net margins if the expected payoff in customer engagement and spend does not materialize as planned.
  
• Despite increased revenue, the underlying operating expenses grew by 26%, driven by higher employee, marketing, and technology costs, potentially squeezing net margins if not managed efficiently.
  
• Stride's performance in Canada showed a significant revenue shortfall due to timing of revenue recognition and client churn, indicating potential volatility and risk in achieving consistent earnings in new markets.
  
• The assumption of fewer jackpots in FY '25 compared to the previous fiscal year could lead to lower-than-expected revenue from lottery retailing if the trend negatively impacts player engagement and spend.

Valuation

• The analysts have a consensus price target of A$14.763 for Jumbo Interactive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$17.85, and the most bearish reporting a price target of just A$12.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$181.5 million, earnings will come to A$52.2 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of A$13.45, the analyst price target of A$14.76 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.