The case for Betsson

The case for Betsson

Money is the blood of an economy. If the blood is poisoned, so is the economy, no matter how well a company does bottom line or how great its prospects are. This is why, before focusing in on any particular company, it’s usually a good idea to make an assessment of the monetary environment that it operates within. Betsson is a good running example of a company doing the best it can given an out-of-kilter monetary environment. Since 2015, it has been the victim of the equivalent of monetary and regulatory sepsis, both of which are totally out of its control.

The case for BetssonThe only job of any company is simply to make more money than before. This, Betsson has succeeded in doing with revenue up 27% since 2015, but its stock has nonetheless cratered over 50% since topping that year. If you’re making more money but your stock keeps falling, something is wrong with the system in which you’re operating. In Betsson’s case, what has done the stock in since 2015 has been regulatory conservatism, a strategic decision on its part, and unfavorable foreign exchange rates, over which it has zero control.

Adopting a conservative stance on the regulatory front can’t really be faulted. It’s a long term strategic decision that people on top have to make, period. Shareholders can throw fits about market forfeiture but exiting markets knowing that this will hurt shareholders short term is sometimes a necessary move that hopefully pays off in the end by decreasing future volatility. If it does in the end it’s called prudent bravery. If it doesn’t, it’s called cowardice in retrospect. That’s just the way the world turns.

What really killed Betsson since 2015 was a six-month period in 2016. Betsson was coming off the back of extremely optimistic growth expectations and quickly deflated that balloon by a downward revision of guidance due to the exiting from several risky European markets, worsened by declines in the Swedish Krona. But clear all that out and just look at its income statements over the years and they’re really nothing to cry over. They’re actually pretty good, challenges considered. Since the end of 2015 when shares topped, revenue is still up 27%. Gross profit is up 29%. A whole slew of important metrics such as active customers, deposits, and other gaming fundamentals have been growing healthily despite setbacks.

Even in its worst quarter since 2015 catalyzed by downward revisions for sportsbook among other things, sportsbook revenues still went up by 9% in its Armageddon quarter, from SEK276M to SEK300M. Of course, had the company not inflated expectations, we wouldn’t have seen as strong a rise in 2015 as we did, and consequently the 2016 plunge would not have been as extreme either.

The near term picture, monetarily speaking for Betsson, appears similarly negative. The Swedish Krona has fallen about 8% versus the Euro since 2015 and it has a long way to go. 33% of Betsson’s markets are Western European. The real trouble for the Swedish Krona looks to still be ahead, just looking at the raw inflation numbers. Since the global Great Inflation of 2008 that came in response to the Great Recession, the Krona supply is up by 89% and the Euro supply is only up 46%. So a decline in the Krona by 8% is nowhere near enough to return to parity by supply since 2008. The Krona has a lot longer to fall, and the Euro may be about to spike higher still on the back of the end of the European Central Bank bond buying program in December. Expect further forex-blamed declines out of Betsson that will serve as headwinds for the rest of this decade.

How much of an impact have exchange rate fluctuations actually had though so far? Well, you can quote reports directly or look deeper. Problem is, exchange rate fluctuations between the Euro and Krona accounted for a negative impact of SEK 31.4M last quarter, which isn’t much, but that’s only what’s reported as forex losses directly. Direct forex losses are calculated at the bottom line level, but forex losses also translate to increased cost of goods in local currency and increased administrative expenses as well, which all eat into the bottom line but aren’t reported as forex losses per se. Combine this with market exits and high expectations due to your reputation as a generally good and healthy company and you end up with a collapse in share price.

The good news is that much of the decline, though maybe not all, appears behind us and Betsson still looks like a fundamentally healthy company, growing despite challenges that are outside its circle of influence. There still is nothing wrong with Betsson on a fundamental level, It’s growing, despite collapsing in share price, which makes it a very interesting long term portfolio pick. Debt is not a serious issue for it and as a Scandinavian company it still benefits from not being part of the Eurozone and therefore not subject to all the craziness that has yet to unfold in that chaotic mess. For those who have been holding on to it since 2015, now is not the time to capitulate, and for those who still do not own it, a 56% percent decline for a company that is still growing looks like a good discount to get in at.

Overall, a 4% plus dividend rate and a steep discount to previous highs, existing outside the Eurozone and Brexit madness and still growing in its top line despite so many external challenges makes it a compelling long term hold.