Australian digital lottery company Jumbo Interactive Ltd (ASX: JIN) has been one of the standout performers on the ASX this year.
Since January, its shares have more than doubled in price and are now trading at an all-time high of a little over $7.
This has capped off a string of successful years of performance – longer-term investors who have held shares in Jumbo for at least the last three years are now sitting on gains of over 700%.
So what has been behind Jumbo's incredible growth story and is it too late for you to invest?
Through its flagship proprietary online service Oz Lotteries, Jumbo sells tickets for government and charity lotteries. But Jumbo is just as much a tech company as it is a gambling business.
In 2017, the company embarked upon a 3 year project with the aim of expanding its digital offering, streamlining the online experience and improving usability while adding several additional features to the platform. One of those features, "Lotto Party", is a social media platform allowing users to create lottery syndicates quickly and easily online and invite friends to play along with them.
So far, initiatives like "Lotto Party" are delivering results for Jumbo, with 215,000 new Oz Lotteries customer accounts created in FY18 (versus 161,000 in FY17). It now has a total of 438,000 active customers.
In total, Jumbo generated almost $40 million in revenues from its continuing operations in FY18, which was a 23% increase on the prior year.
Net profit was $11.8 million, an impressive 55% uplift on FY17. The fact that Jumbo is growing its bottom line at a faster rate than its revenues is a particularly bright signal to investors and might be a key reason for the recent surge in its share price. It shows that Jumbo is successfully scaling up its business and increasing its margins by generating higher sales off of a lower cost base.
Jumbo forecasts that its revenue margin will decline to 20% to 21% in FY19 versus the 21.7% the company reported in FY18.
However, EBIT margin is expected to continue to grow, from 41% in FY18 to between 44% and 46% in FY19, indicating that Jumbo anticipates realising even greater economies of scale.
Since releasing its FY18 preliminary final report on 17 August, Jumbo's share price has shot up over 40%. But even at these prices, I think Jumbo offers great value for investors.
The company's shares now trade at a multiple of roughly 30x earnings. Compare this with the shares of competitor in the gambling and lottery space Aristocratic Leisure Limited (ASX:ALL), which trades at almost 37x earnings.
Or Tabcorp Holdings Limited (ASX:TAH) which, after surprising the market by reporting a 71.4% jump in earnings in FY18, now trades at a massively inflated multiple of over 256x earnings.
Both Aristocrat and Tabcorp dwarf Jumbo in terms of annual revenues. Tabcorp pulled in $3.3 billion in FY18 while Aristocrat, which reports on a fiscal year ending 30 September, generated almost $2.5 billion in revenues in its first half of FY18 alone.
However, Jumbo's focus on increasing customer engagement by improving its digital technologies, along with effective cost management, provide a solid foundation from which it can continue to rapidly scale up its business and really challenge its larger rivals.
Foolish takeaway
Jumbo is an exciting small company operating in the gambling and lottery space with a proven ability to outperform market expectations. And even after the recent surge in its share price its earnings multiple still compares favourably against its larger competitors.
In my opinion, Jumbo still offers great long-term growth potential at these prices. However, with a market cap of only $400 million and a shorter track record of success, it does carry greater risk than its more established rivals.
Those with a lower tolerance for risk, but who still seek exposure to this sector may prefer to invest in Aristocrat Leisure, which has demonstrated similar revenue growth to Jumbo. However, given Aristocrat's already large size, it may not have as much room to sustain this growth rate over the longer-term.
