Google’s Algorithm Tweaks Are Present Challenge, Future Chance For Gambling.com

The first thing you need to know about Gambling.com (GAMB) is that, contrary to its name, it’s not a place for gambling. Instead, through its portfolio of branded websites—which include Gambling.com, Bookies.com, Casinos.com, RotoWire.com, BonusFinder.com and Freebets.com—the company provides information and reviews on various betting and gambling services, including online casinos, sportsbooks and poker platforms. These sites guide users in selecting reputable and legal gambling options tailored to their locations and preferences. GAMB earns fees when a user clicks on a link from one of the company’s websites to an online gambling operator, registers a new account and makes a deposit.

GAMB has had a terrific start to 2024. Driven by rising demand around the world—its markets are primarily North America and Western Europe—and a strong initial contribution from the launch of online sports betting in North Carolina on March 11, the company delivered more than 107,000 new depositing customers to its clients in Q1. This represents a year-over-year increase of 22% and drove a 10% climb in revenue to a first-quarter record $29.2 million, even though the prior-year quarter benefited from significantly more new U.S. states allowing online betting. Earnings came in at 20 cents a share, beating Wall Street’s estimate of 14 cents but flat on the year because of an accounting item related to recent acquisitions that boosted prior-year results by 2 cents.

The company’s hand was at least temporarily weakened, however, by changes at Google in May. The search engine altered the way its algorithm treats content like GAMB’s sponsored articles (a.k.a. native advertising which is designed to blend in with the surrounding content so that it appears more like editorial content than traditional advertisements) on media sites such as USA Today. As a result, GAMB reduced its full-year guidance for revenue by $11 million and adjusted Ebitda by $4 million, even with the strong Q1 results already in the books. This indicates lower-than-expected operating performance for the rest of the year, explaining why investors are abandoning a stock that had already fallen 38% since November and is now down 6% more.

I believe this decline has been overly severe. First off, the earlier sell-off was triggered by guidance for the final quarter of 2023, which implied revenue of just $25.9 million versus the $27.8 million analysts had anticipated. However, the company ultimately delivered revenue of $32.5 million when it officially reported results on March 21. Meanwhile, the new Google policy could benefit GAMB in the long run. The algorithm changes have reduced competition in search-engine results from media websites and have already led to an increase in traffic and improved search visibility for GAMB’s own websites. Although this means collecting fewer referral fees from people clicking on its ads on media websites, it also reduces the commission paid to these media companies. Combined with the higher proportion of traffic now flowing directly to its own web pages, which carry gross margins of 100%, the net effect on earnings from these changes will be limited.

Even the reduced outlook still implies sales and Ebitda growth of about 11% and 22% at the midpoint over the rest of the year. GAMB’s assumptions do not account for any additional North American markets legalizing online sports betting in 2024 besides North Carolina—unlike 2023, which saw launches in Ohio, Massachusetts, and Kentucky—or the benefit from the increased traffic already seen from the Google switch to its own websites. Therefore, there’s a good chance that actual results for 2024 will come in quite a bit better than the cautious guidance.

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I expect a number of developments that are likely to help GAMB maintain solid top-line growth. This includes further gains in market share, the benefit from expected future expansions of iGaming and online sports betting in new markets in North America (which already accounts for over 60% of revenue, even though 43 states have yet to allow online casinos and 19 still forbid online sports betting) and further growth in its established European markets. Thanks to these ongoing drivers, which remain robust, the company indicated it remains comfortable with the current consensus estimate for 2025 adjusted Ebitda of $54.8 million. This would represent growth of over 30% from what it now expects to generate in 2024, with the potential to reach $100 million over the next few years. If so, I’d expect a similarly impressive rebound by its stock.

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