Online Casino Saturation And Latin American Tax Risks Will Constrain Long-Term Earnings Expansion

Catalysts

About Rush Street Interactive

Rush Street Interactive operates regulated online casino and sports betting platforms across North and Latin America.

What are the underlying business or industry changes driving this perspective?

• Although RSI continues to post record online casino growth and double digit North American MAU expansion, the increasingly saturated U.S. and Canadian iCasino landscape limits incremental share gains. This could slow the current 20 percent revenue growth trajectory and cap long term earnings expansion.
• Despite strong momentum in Latin America with rapidly rising MAUs, mounting regulatory and tax uncertainty in Colombia and potential higher gaming taxes in Mexico risk compressing net revenue and EBITDA margins just as these markets scale. This could dilute the benefit of current GGR growth.
• While the company’s proprietary platform and payment innovations support attractive customer acquisition costs and engagement, ongoing requirements to reinvest in technology, compliance and responsible gaming to keep pace with evolving regulation may absorb a growing share of gross profit. This could limit future margin expansion.
• Although expanding online casino legalization in jurisdictions like Alberta and select U.S. states could unlock new markets, slower than expected legislative progress or tighter tax regimes may result in lower than modeled returns on these entries. This may mute their contribution to long term revenue and EBITDA growth.
• While the shift toward higher value online casino play and in game wagering structurally supports higher hold rates, elevated competition and rising bonusing needs to defend share could keep ARPMAU under pressure. This may constrain operating leverage and earnings growth even as the user base expands.

Assumptions

This narrative explores a more pessimistic perspective on Rush Street Interactive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Rush Street Interactive's revenue will grow by 13.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.8% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach $38.3 million (and earnings per share of $0.1) by about December 2028, up from $30.1 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 64.9x on those 2028 earnings, up from 63.9x today. This future PE is greater than the current PE for the US Hospitality industry at 22.0x.
• The bearish analysts expect the number of shares outstanding to grow by 3.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The sustained acceleration in North American online casino MAU growth, including 46 percent year over year growth in higher value casino markets and record first time depositors achieved with lower customer acquisition costs, could drive structurally faster revenue growth than expected and support continued expansion in earnings.
• Ongoing mix shift toward regulated online casino, where RSI already demonstrates strong product differentiation, higher player retention and improving gross margins, may enhance operating leverage over time and result in higher net margins and earnings than implied by a flat share price outlook.
• Planned geographic expansion, such as the anticipated day one launch in Alberta and potential legalization of online casino in additional U.S. states under budget pressure, could open new high value markets and materially increase long term revenue and profitability.
• The temporary nature of adverse tax effects in Colombia, including the VAT structure and proposed 2026 tax reform that management believes lacks congressional support, together with rationalized bonusing when conditions normalize, could lead to a step up in net revenue and EBITDA margin from Latin America.
• The company’s strong balance sheet with substantial unrestricted cash and no debt, combined with continued investment in proprietary technology and payments innovation that improves both player experience and transaction costs, may enable outsized reinvestment returns and support faster earnings growth and higher valuation multiples.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Rush Street Interactive is $18.0, which represents up to two standard deviations below the consensus price target of $23.43. This valuation is based on what can be assumed as the expectations of Rush Street Interactive'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 $30.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $38.3 million, and it would be trading on a PE ratio of 64.9x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $19.65, the analyst price target of $18.0 is 9.2% lower. 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.