Traumhausverlosung Expansion And Rising Costs Will Shape Future Outcomes

Key Takeaways

• Strong customer acquisition and strategic billings expansion signal promising future revenue growth and stable earnings.
  
• Focus on operational efficiency, alongside intelligent marketing investment, is poised to enhance long-term profitability.
  
• Significant marketing and operational cost increases pose risks to net margins, especially if heightened revenues from favorable jackpot conditions aren't sustained.

Catalysts

Engages in the online lottery brokerage business in Germany.

• The strong performance in customer acquisition and an expansion of billings margins, along with efficient use of marketing during peak jackpots, indicate robust future revenue growth prospects.
  
• Continued scaling of the Traumhausverlosung initiative and targeting more than €30 million in billings for 2025 suggests significant potential for revenue increase.
  
• Efforts to improve customer acquisition strategies during low jackpot phases are expected to stabilize and enhance net margins by making growth less dependent on external variables.
  
• Expansion of the Games business, with plans to double the number of games, is projected to contribute substantially to revenue, aiming for €40 million, representing a 40% year-over-year growth.
  
• Strategic focus on improving operational margin and cost discipline, while increasing marketing investment intelligently, is likely to enhance earnings and EBITDA margins sustainably in the long term.

ZEAL Network Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ZEAL Network's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.6% today to 19.0% in 3 years time.
• Analysts expect earnings to reach €46.0 million (and earnings per share of €2.12) by about April 2028, down from €58.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €54.8 million in earnings, and the most bearish expecting €39 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.5x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the GB Hospitality industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 3.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.11%, as per the Simply Wall St company report.

ZEAL Network Future Earnings Per Share Growth

Risks

• The exceptionally favorable jackpot environment in 2024, with 13 peak jackpots compared to the historical average of 6.5, significantly boosted customer acquisition and revenue, which may not be replicated in future average jackpot years, impacting revenue growth.
  
• Increased personnel costs by 40%, driven by a 21% increase in employee numbers and increased provisions for short and long-term incentives, could pressure net margins if revenue growth doesn't maintain pace with these expanded costs.
  
• Direct operating costs increased by 54%, partly due to a larger share of PayPal usage and higher costs for customer onboarding and games commissions; these rising costs could negatively impact net earnings if not offset by proportionate revenue growth.
  
• The company booked a €2.2 million provision for expected legal costs related to the Lotto24 squeeze-out, which highlights the risk of further one-off legal or compliance costs impacting financial performance.
  
• Marketing costs increased by 58% in 2024, with further increases planned, which may affect net earnings if the efficiency of marketing spend does not improve or if it doesn't lead to a commensurate increase in revenue.

Valuation

• The analysts have a consensus price target of €61.0 for ZEAL Network 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 €69.0, and the most bearish reporting a price target of just €58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €242.5 million, earnings will come to €46.0 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 6.1%.
• Given the current share price of €43.2, the analyst price target of €61.0 is 29.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.