Today I’m looking into Bragg Gaming Group (NASDAQ:BRAG) (TSX:BRAG:CA). It is a Canadian-based iGaming technology company that has grown substantially in recent years through acquisitions and organic expansion. I believe Bragg Gaming will be profitable by the end of 2023, and the company is beginning to seem inexpensive based on fundamentals. At the present, I rate the stock as a speculative Buy. 

A Business and Financial Overview

Bragg Gaming is a business-to-business (B2B) online gaming technology platform and casino content aggregator. The company has over 6,500 casino game titles, which include games created by its own in-house studios (Wild Streak Gaming, Spin Games, Atomic Slot Lab, Indigo Magic, and Oryx Gaming), unique titles created by third-party partners, and aggregated licensed games. It also features a player account management platform (PAM), which offers tools for running an online gaming business such as player interaction and data analysis software. Bragg Gaming employs approximately 400 employees and operates in Europe, North America, and Latin America with offices in Toronto, Las Vegas, Reno, London, Ljubljana, Malta, and Chennai. Looking at the financial performance over the last decade, we can observe that revenues have expanded more than 20 times since FY14, with many acquisitions being the primary driver.

Bragg Gaming was previously known as Breaking Data Corp, an artificial intelligence services provider, until late 2018, when it purchased Oryx Gaming, a gaming and turnkey solutions supplier. Following that, in June 2021, Bragg Gaming acquired iGaming content studio Wild Streak, and in June 2022, it acquired iGaming technology supplier and content provider Spin Games.

Looking at the financial results for the first quarter of 2023, we can see that organic growth has picked up, with revenues increasing by 18.1% year on year to €22.9 million ($25.2 million), thanks to a 42.8% increase in the number of unique players to 2.8 million and a 35.7% increase in total wagering generated via games and content to €5.2 billion ($5.7 billion).

The gross profit margin increased by 170 basis points to 53.5%, while adjusted EBITDA increased by 28.1% to €3.9 million ($4.3 million). The primary reasons for this are economies of scale and rising contributions from proprietary material. Bragg Gaming intends to increase income from exclusive content, PAM, and turnkey solutions to achieve a gross profit margin of 60% by 2024. They have no sales charges, as opposed to third-party games and content, which have related third-party expenditures.

Turning to the balance sheet, I believe the situation is substantially better than it was in December 2022, as stronger cash flow from operating activities allowed Bragg Gaming to increase cash and cash equivalents to €15.1 million ($16.6 million). As a result, the net cash position increased to €9.6 million ($10.5 million) from €4.5 million ($5 million).

Bragg Gaming has confirmed its 2023 revenue estimate of €93 million ($102.2 million) to 97 million ($106.6 million) and adjusted EBITDA of €14.5 million ($15.9 million) to €14.5 million ($18.1 million). In my opinion, the company is likely to meet its full-year target because it is speeding the release of new titles and the opening of operations in new areas. Bragg Gaming launched a total of 26 online titles in Q1 2023, an increase of 89% from the previous year. Furthermore, the company established a presence in Italy, Mexico, and Belgium, as well as new partners in Switzerland, Spain, and the United Kingdom. Bragg Gaming was on schedule to deliver 33 separate exclusive online content titles in H1 2023, including 15 from its own studios, according to the most recent corporate presentation. Economies of scale and a higher share of revenue from proprietary content, in my opinion, will allow the company to post a positive quarterly net profitability by the end of 2023 (the Q1 2023 net loss was $0.5 million).

In terms of valuation, Bragg Gaming has an enterprise value of $58.9 million at the time of writing and an LTM EV/adjusted EBITDA ratio of 4.2x. The EV/EBITDA ratio would be 3.5x at the midpoint of the 2023 EBITDA estimate of $17 million. Given that Bragg Gaming has a continually growing business with rising margins due to economies of scale and a growing share of revenues from proprietary content, I believe it should be trading at a multiple greater than 6x EV/EBITDA. With an annual EBITDA of $17 million, this amounts to $5.22 per share, representing a 58.2% upside potential.

Looking at the risks for the bull case, I believe the most significant is if the new games produced by Bragg Gaming’s in-house studios underperform in terms of revenue and wagering during the remainder of 2023, negatively impacting margins. This could also result in a miss of the lower end of the EBITDA projection for 2023. Furthermore, investors should keep in mind that this is a lightly traded stock, with a daily trading volume on NASDAQ rarely topping 10,000 shares. The situation is significantly worse on the TSX, where daily trading volume is frequently less than 2,000 shares. Given this, there may be significant share price volatility, making it difficult to sell a large stake.

Bottom Line

Bragg Gaming reported outstanding Q1 2023 financial results due to organic growth, and I believe the company will meet its full-year projection. Bragg Gaming is valued at only 3.5x EV/EBITDA based on the midpoint of its 2023 EBITDA estimate, and I expect economies of scale and an increasing share of revenues from proprietary content to enable the firm to generate a positive quarterly net income by the end of 2023. However, this is a sparsely traded stock, and the success of new games from in-house companies is crucial. This is why I’m giving Bragg Gaming a speculative Buy rating.

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