What a fantastic six months it’s been for Rush Street Interactive. Shares of the company have skyrocketed 49.2%, setting a new 52-week high of $15.35. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Rush Street Interactive, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
We’re happy investors have made money, but we don't have much confidence in Rush Street Interactive. Here are three reasons why you should be careful with RSI and a stock we'd rather own.
Why Is Rush Street Interactive Not Exciting?
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE:RSI) is an operator of digital gaming platforms.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Rush Street Interactive’s revenue to rise by 9.5%, a deceleration versus its 24.5% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
2. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Rush Street Interactive’s operating margin has been trending up over the last 12 months, but it still averaged negative 4.4% over the last two years. This is due to its large expense base and inefficient cost structure.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Rush Street Interactive has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.2%, lousy for a consumer discretionary business.
Final Judgment
Rush Street Interactive isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 97.7× forward price-to-earnings (or $15.35 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
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