Fantasy Aces (FAS.V) updates financials, shows growth, tight margins

Daily fantasy sports is a niche sector that has been through the wars in 2016, with several US states coming at a quickly established and big money industry, demanding it prove it isn’t simply unlicensed gambling dressed up as a game of skill.

Though there’s a skill element to daily fantasy sports, the same as there is in poker, the ultimate win is based on situations out of the player’s control, so personally I don’t think there’s doubt that the industry is gambling.

But there’s also no doubt Uber breaks laws around taxi and limo service, and Air BNB betrays local laws around licensing B&Bs, so in a world where getting to market and growing quickly enough can force the powers that be to change the rules for you, rather than insisting you follow them, the DFS business has done well to get on the good side of lawmakers.

That regulatory spat playing out earlier in the year hurt companies in the DFS business, and few moreso than Fantasy Aces (FAS.V), which had only recently gone public when the issue arose, and was building a fast fanbase, albeit far smaller than the dominant two players in the game, FanDuel and DraftKings.

2016 has been a better year for the company than 2015 was, but Q3 was down from Q2, partly due to the end of the baseball and NBA seasons, but also partly to lower marketing spends.

HIGHLIGHTS Q3

  • Gross Revenue of $454,689, 170% increase over Q3 2015
  • Prize Payouts of $5,315,133, 169% increase over Q3 2015
  • Game Entries: 494,254, 168% increase over Q3 2015
  • Site Marketing Expense reduced 235% for the same period

HIGHLIGHTS Q2

  • Gross Revenue of $514,984, 280% increase over Q2 2015
  • Prize Payouts of $5,649,000, 240% increase over Q2 2015
  • Game Entries: 655,270, 230% increase over Q2 2015

If that gross revenue seems low, that’s a factor of the way DFS is built. With competition so hot between companies in the space, and the size of payouts being a big factor in attracting players – or otherwise – Fantasy Aces is inextricably drawn into a marketing war it must stay in if it is to grow, but that helps bleed it financially to a place where margins are razor thin.

Prize payouts amounted to $9 million in the first halt of the year, which was up 243% on the previous year. 100,000 users are in the company database, with half of those coming from a $450k most-stock buyout of Fantasy Feud earlier in the year.

So is Fantasy Aces worth buying into? Well, that’s a tough one.

There’s no denying the number of players has been growing, as is the revenue and prize payout level when compared to 2015. But a lack of cash hemmed the company in a little on its promotional efforts, which may come back to haunt them over time.

FanDuel and DraftKings are looking to merge, which would create a mega-dominator in the sector, but also likely free up some players for something new. As a larger dominant player would have less need to spend the hundreds of millions it has thus far in the ongoing 1-2 war, it may focus itself on gobbling up the smaller players. It may just as well focus on driving them out of business, by putting its money to impossibly large payouts rather than advertising.

Currently, Fantasy Aces is trading at an incredibly low $1.8 million market cap, which makes it worth a punt going forward. In pre-rolback terms, the company is a 1c stock, but the 5c it’s currently trading at leaves a lot of value for any sort of positive lift in what is always a healthy Q4 in the DFS space.

If you’re looking for a turnaround, and you have a little patience, maybe this is worth a sniff. For me, watchlist.

— Chris Parry

 

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

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