Rising Regulatory Pressures And Tech Disruption Will Erode Profit Margins

Key Takeaways

• Regulatory tightening and rising compliance costs are set to constrain revenue growth and compress margins, challenging Kambi's profitability.
  
• Market commoditization, client concentration, and increased spending on security and compliance threaten pricing power, diversification, and earnings growth.
  
• Diversified revenue, new market wins, technological investment, and operational efficiencies position Kambi for resilient growth amid expanding regulated sports betting markets.

Catalysts

Provides sports betting technology and services to the betting and gaming industry in Europe, the Americas, and internationally.

• Facing growing barriers to market entry and higher compliance costs as jurisdictions like the Netherlands, Colombia, Sweden, and Illinois implement tighter regulations, deposit limits, and higher gaming taxes; this sustained regulatory tightening is likely to suppress Kambi's long-term revenue growth and squeeze net margins.
  
• The accelerating entry of big technology and AI-first players is expected to commoditize sports betting technology, eroding Kambi's pricing power and market share, particularly as many Tier 1 and Tier 0 operators are building internal solutions or insourcing, which could directly reduce both topline revenue and long-term earnings.
  
• Industry-wide margin compression will intensify as consolidation among sportsbook operators leads to fewer, larger clients with stronger negotiating power on pricing; this will force Kambi to lower its fees and invest heavily in ongoing R&D and platform upgrades, further weakening profitability and net margins.
  
• Persistent customer concentration risk remains despite attempts to diversify, as Kambi still relies on a handful of large contracts-continued loss, insourcing, or renegotiation with key clients (as seen with partner exits and reduced module revenues) could result in substantial declines in revenue and diminishing operating leverage in future periods.
  
• Increasing cyber threats and stricter responsible gambling demands will drive up operational and capital expenditures, both to maintain platform security and to ensure compliance; these unavoidable costs will limit Kambi's ability to improve net margins and may cap future earnings growth even if gross revenues rise.

Kambi Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kambi Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kambi Group's revenue will grow by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.4% today to 12.1% in 3 years time.
• The bearish analysts expect earnings to reach €23.0 million (and earnings per share of €0.8) by about July 2028, up from €13.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 27.0x today. This future PE is lower than the current PE for the SE Hospitality industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 3.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Kambi Group Future Earnings Per Share Growth

Risks

• Kambi has successfully diversified its revenue base, reducing dependency on its largest clients from 60 percent to 39 percent since 2021, which makes future revenue more resilient and less vulnerable to customer churn or the loss of individual contracts.
  
• The company is achieving substantial new contract wins and expansions, such as the Ontario Lottery (OLG) deal running through 2032, entry into the growing Brazilian sports betting market, and product launches like Odds Feed+, all of which are poised to drive double-digit top-line revenue growth over the coming years.
  
• Investment in proprietary technology-particularly in AI-driven trading, risk management, and the Tzeract platform-is expected to yield product differentiation, greater cost efficiencies, and expanding net margins as manual trading is replaced with scalable automation.
  
• Kambi's strategy of focusing on state-owned and regulated lottery contracts and ongoing participation in multiple public tenders across North America, Europe, and Asia positions the company to benefit from the secular trend of sports betting legalization and the expansion of regulated B2B markets, directly supporting both revenue and earnings growth.
  
• The ongoing efficiency program has already delivered flat costs despite inflation and is set to deliver increasing cash and operating margin savings through 2025 and beyond, providing the company with a strong cash position for shareholder returns, new investments, and business resilience, which can further improve net margins.

Valuation

• The assumed bearish price target for Kambi Group is SEK112.22, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kambi Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK194.65, and the most bearish reporting a price target of just SEK112.22.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €189.9 million, earnings will come to €23.0 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of SEK139.6, the bearish analyst price target of SEK112.22 is 24.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.