A small company with Jumbo potential

This company has good growth prospects ahead, including expansion into international markets.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Did you miss the dot.com investing boom of the late '90s and early 2000s? Then consider yourself lucky – you missed the tremendous fallout as well. Besides, the best opportunities to ride the wave of promising online businesses may still be before you.

One such opportunity is Jumbo Interactive (ASX: JIN), based in Brisbane. This quite small company has a market cap just over $80 million and good growth prospects ahead, including expansion into international markets.

Domestic business

Today, Jumbo has an established Australian business. It operates the popular gambling site OzLotteries.com, among other related lottery and game sites. These involve customers buying buy lottery tickets, such as those sold by Tatts Group (ASX: TTS), with Jumbo acting as an agent and earning a portion of sales. This online lotto-agent business has high margins and may still grow following the incredible success of the last 10 years, in which net profits grew from a net loss to nearly $7 million for the 2012 financial year.

To keep current with technological trends, the company has also developed smartphone apps and a number of other innovative products that enable customers to purchase lottery tickets no matter where they are and to play lotteries with their friends through social media sites such as Facebook.

With the overall Australian lottery market worth $4 billion according to company estimates (and online lottery sales representing less than 10% of total lottery ticket sales), while Jumbo's total transaction value looks to be between $102 million and $106 million for 2013, and in combination with the continuing trend toward online purchasing of all manner of goods, this company looks to be a winning ticket in years to come. Still, see below for the risks inherent in this business.

International expansion and opportunity

The international opportunity is especially exciting. Jumbo has recently expanded into Latin America, announcing a deal to help introduce and manage online lottery sales in Mexico. It's also moved into Germany, having secured the rights to sell lottery tickets via web and mobile in one German state already, with plans in the works to acquire necessary licenses in other German states.

Most recently, Jumbo has moved into the U.S. market, signing a joint-venture deal with Retail Gaming Solutions, a privately held American company, to provide in-store rewards systems at about 1,000 convenience stores throughout the U.S. (Trials of the program found that lottery ticket sales rose some 38% following the introduction of the Jumbo/RGS rewards systems, suggesting the system is very much a win-win.)

Jumbo estimates that these new markets contain some 500 million potential customers and are worth over $70 billion in terms of lottery sales. (By way of proxy, consider that the portion of lottery sales completed online has reached 15% in the UK and 30% in Finland in recent years.) Should the company eventually capture but a small fraction of these customers and sales, it's likely that Jumbo will move quickly out of small cap territory.

Still, such a win is not going to happen overnight, but over several years. Potential investors need to be patient when it comes to this company.

Balance sheet & valuation

Jumbo Interactive currently has a strong cash position and no debt. This should allow Jumbo to continue to pursue its expansion efforts.

Shares appear relatively cheap, trading for 14 times trailing earnings. However, full year 2013 earnings are likely to be much lower than 2012 earnings on account of the impact from expansion efforts and some accounting changes – another reason this play is one for long-term oriented investors.

The risk of being a third party

A key risk to bear in mind when considering an investment in Jumbo is the company's status as a 'third party.' That is, the game owner/license manager could choose not to allow sales through Jumbo sites, but instead keep all the cake for himself, as it were. While some long-term agreements help to contain this risk, it's important to recognise that the balance of power isn't entirely in Jumbo's favour.

Foolish takeaway

Those looking for a pure gamble may just want to stick to lottery tickets. But if you're a patient, long-term investor looking for a bit of small-cap spice to add to your diversified portfolio, Jumbo Interactive shares could be a good bet.

In the market for high-yielding ASX shares? Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any company mentioned.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »