Should you invest, or not invest in the stock market at the moment? Or, in keeping with the theme of this post, the question could be… should you gamble, or not gamble? Both are risky, any which way you look at it.
For the past week as part of an assignment, I have been scrutinising the books and operation of the ASX 300 listed company, Jumbo Interactive Ltd (ASX: JIN). Founded in Toowong, Queensland in 2005 a software development company and internet service provider, Jumbo Interactive provides large and small fundraising, lotteries and raffles in Australia and Asia-Pacific with the digital tools and management solutions to succeed. The core product range has moved from an online lottery reseller to three operating segments: Lottery Retailing, Software-as-a-Service (SaaS) and Managed Services. It essentially utilises intelligent software to market and sell lottery tickets for government and charitable lotteries.
I have heard of most of the Australian lotteries, such as Tatt’s Lotto, Powerball, Oz Lotto and Saturday lotto, and never really considered them seriously as “gambling’. It’s just a game, right? No! It’s definitely gambling, and it’s big business in Australia thanks to companies like Jumbo Interactive.
So, it really got me thinking about gambling not just as sport or entertainment, but as an industry in itself and of course the knock-on effect of income that the government generates. The fact is that the act of wagering money on an uncertain outcome, with the aim of winning money has been around since Palaeolithic times, probably because it’s entertaining, exciting and it’s addictive. In my opinion, it’s one of the riskiest things to do with money. I admit, I have a flutter every now and then at the casino, or buy a Saturday Lotto with my “lucky” numbers. Many people do! But, these days, instead of going to the local Newsagent, TAB, RSL, Race Track or Casino to lay down a bet, today’s technology, like the nimble, digital and 100% pure online technology that Jumbo Interactive develops, has allowed the art to infiltrate every household across the world that has internet and a device, creating a metamorphic $500 billion dollar per year industry.
Since going down the Jumbo Interactive rabbit hole, it has been an eye-opening experience in terms of understanding the global industry of gambling. Jumbo Interactive operates ozlotteries.com and is also the online retailer of charitable lotteries such as Surf Life Saving, Mater Prize Home and the Endeavour Foundation and more recently has partnered with the government-licensed monopolistic national lottery operator Tabcorp. I’ve read Jumbo Interactive’s Annual Reports for the past 5 years, and can see that the earnings per share price grew 94% per year since 2014 with an average share price of $7/share, however in October 2019 (their renowned “breakout” year), the share price increased to a whopping $27/share!!! However, during the 2020 Global Pandemic, the share price dropped to $10/share which seems to be when all the pre-covid panic selling was happening. It has recovered slightly and is sitting at $13/share today. Considering that many international lotteries have suffered due to lock downs, it seems that Australian lotteries have marched forward, and it seems to be thanks to Jumbo Interactive’s healthy online sales channel.
During my research of the fiscal position, I have also uncovered some inherent risks that Jumbo Interactive has in their underlying earnings. The first is the changes in gambling regulations, which will always remain a threat to the gambling industry and could potentially disrupt Jumbo Interactive’s business model, or could even lead to an increase in competitors. It is technology, after all!
Also, the biggest risk to any company, especially Jumbo Interactive, is free cash flow (the measure of a thriving company) and there does not appear to be enough to match its profit, which raises a red flag for me when it come to future earnings. The company has paid dividends from most of their earnings, and with such a fast earnings per share growth, I would be cautious about extrapolating the same rate of growth in the long term. However, I have always defaulted to Warren Buffet’s famous one-liner about economic moats. He says, “In business, I look for economic castles protected by unbreachable ‘moats.” At this point of the rabbit hole, it seems that Jumbo Interactive has a strong balance sheet as a moat, which has offered shareholders solid returns, even in a crisis. But, I will keep digging to find out more.
“Gambling is a seriously big business, but online gambling is colossal!”