Digital Payment Solutions And Buybacks Will Drive Platform Expansion In Coming Years

Key Takeaways

• Expansion into online gaming and betting is driving strong user growth and positions the company for revenue increases and broader geographic reach.
  
• Proprietary technology and improved marketing efficiency are boosting user engagement and margins, with temporary tax pressures set to ease and enhance profitability.
  
• Heavy reliance on Latin American expansion and increased marketing spend exposes RSI to regulatory, tax, and margin risks, potentially limiting future revenue and profit growth.

Catalysts

Operates as an online casino and sports betting company in the United States, Canada, and Latin America.

• The digitalization of entertainment is accelerating migration from offline to online gaming, and with record-high monthly active users (MAUs) growing over 30% in North America and 40%+ in Latin America, Rush Street Interactive is well-positioned to capture this expanding addressable market, supporting sustained future revenue growth.
  
• Ongoing legalization and regulatory acceptance of online sports betting and iGaming in North America and Latin America-evidenced by strong launches and growth in new markets like Delaware, Alberta (pending), and Mexico-provides a clear pathway for robust revenue expansion and geographic diversification in future periods.
  
• RSI's proprietary technology platform and product integration (e.g., seamless cross-play between poker, casino, and sportsbook) are driving higher user engagement, industry-leading ARPMAU, and improving gross and EBITDA margins as scale increases and third-party vendor costs are optimized.
  
• Marketing efficiency improvements, with customer acquisition spend at historic lows as a percentage of revenue despite record user growth, highlight the company's ability to expand market share while supporting margin expansion and long-term earnings growth.
  
• Temporary tax headwinds (e.g., VAT in Colombia) currently suppress margins and net revenue, but these are likely to abate, creating an embedded near-term catalyst for disproportionate earnings and cash flow uplift once these costs drop off.

Rush Street Interactive Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Rush Street Interactive's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $74.8 million (and earnings per share of $0.48) by about March 2029, up from $33.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $109.9 million in earnings, and the most bearish expecting $47.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 52.9x on those 2029 earnings, down from 64.5x today. This future PE is greater than the current PE for the US Hospitality industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.17%, as per the Simply Wall St company report.

Risks

• Aggressive growth in Latin America, particularly Colombia and Mexico, leaves RSI materially exposed to regional tax risks and regulatory uncertainty, as evidenced by the temporary VAT in Colombia-future regulatory changes or renewed taxes could compress net revenue and EBITDA margins.
  
• User growth in key jurisdictions (e.g., North American iCasino and Ontario), while strong, may slow as markets mature and growth comps become tougher, potentially capping long-term revenue acceleration and impacting earnings growth trajectories.
  
• Increased marketing expenditure planned for the second half of the year and potentially beyond, in response to heightened competition for customer acquisition, may drive up customer acquisition costs and dilute net margins and return on marketing spend over time.
  
• Limited near-term updates on market expansion (outside Alberta), with guidance and growth heavily reliant on existing live markets, raises the risk that long-term revenue growth could stagnate if new jurisdictions do not legalize or if RSI's expansion lags larger competitors.
  
• Potential for rising regulatory scrutiny and higher state or jurisdictional taxes (e.g., Illinois and New Jersey) could erode RSI's profitability by increasing operating costs and limiting margin expansion in core revenue sources.

Valuation

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

• The analysts have a consensus price target of $24.91 for Rush Street 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 $30.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $1.8 billion, earnings will come to $74.8 million, and it would be trading on a PE ratio of 52.9x, assuming you use a discount rate of 8.2%.
• Given the current share price of $20.98, the analyst price target of $24.91 is 15.8% higher.
• 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.