Jumbo Interactive has developed into a leading digital lottery retailer and software provider, operating across Australia, the United Kingdom, and Canada. The company operates through three segments—Lottery Retailing, Software-as-a-Service (SaaS), and Managed Services—which contribute to a diverse revenue base. With robust digital lottery growth, innovative product offerings, and strategic partnerships, Jumbo Interactive is well-positioned to capitalize on the expanding online lottery market and achieve sustained revenue growth.
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Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Jumbo Interactive. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Jumbo Interactive either. Thus, I have no personal stake in Jumbo Interactive. If you want to purchase shares (or fractional shares) of Jumbo Interactive, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
Jumbo Interactive began as a software development company but later pivoted toward the online lottery business. Its primary operation involves selling official lottery tickets online, both in Australia and internationally, by acting as an intermediary and providing a digital platform for customers to purchase tickets for various official lottery games. The company was founded by Managing Director and Chief Executive Officer Mike Veverka in 1995 with a single computer and has since evolved into a leading digital lottery retailer and lottery software provider, employing over 250 people across Australasia, the United Kingdom, and Canada. Jumbo Interactive was listed on the Australian Securities Exchange in 1999. The majority of the company's revenue is generated in Australia, accounting for 82% of total revenue, while the remaining 18% comes from international operations. Of this revenue, 77% is derived from governments and 23% from charities. Jumbo Interactive operates through three segments: Lottery Retailing, Software-as-a-Service (SaaS), and Managed Services. The Lottery Retailing segment, under the Oz Lotteries brand, is a well-established business focused on selling Australian national and charity lottery tickets. Jumbo provides a convenient digital platform for customers to purchase and manage lottery tickets and operates under long-term Reseller Agreements with subsidiaries of The Lottery Corporation Limited (TLC). These agreements, which extend until 2030, cover several Australian states and territories. The company earns revenue in this segment through commissions on ticket sales, making it the largest contributor to total revenue at 78%. The Software-as-a-Service (SaaS) segment, branded as 'Powered by Jumbo' (PBJ), focuses on licensing its proprietary lottery software platform to government and charity operators in Australia and internationally. This platform enables operators to manage and run digital lottery operations efficiently. Revenue in this segment is generated through recurring license fees paid by these operators to use Jumbo's proprietary software. The SaaS segment contributes 6% of the company's total revenue. The Managed Services segment offers comprehensive lottery management solutions through its subsidiaries in the UK and Canada, including Gatherwell Limited, Stride Management Corp., and StarVale Group. It provides turnkey digital lottery platforms and services such as ticket sales, fulfillment, and marketing to schools, local authorities, councils, and small society lotteries. Revenue in this segment is derived from management fees, commissions on ticket sales, and additional service fees, contributing 16% of Jumbo Interactive's total revenue. Jumbo Interactive's moat, is built upon its established partnerships and contracts, a loyal customer base, and strong regulatory expertise.
Mike Veverka is the CEO, founder, and executive director of Jumbo Interactive. He holds a Bachelor of Civil Engineering from Queensland University of Technology. Mike Veverka has a proven track record in business and computing, having established several successful startups to meet emerging consumer demands for online products. His entrepreneurial talent and ambition for innovation were evident from a young age; at fifteen, he developed and sold his first software package to Hewlett Packard. Before founding Jumbo Interactive, Mike Veverka worked as a design engineer and computer programmer and later founded Squirrel Software Technologies, a company that provided some of Australia’s earliest internet services and e-commerce software. As the founder and CEO of Jumbo Interactive, Mike Veverka has played a pivotal role in the company’s growth strategy, innovation, and market presence. While there is limited public information on Mike Veverka, I generally find it favorable when founders serve as CEOs, as they tend to be more focused on long-term business growth rather than short-term financial gains. Mike Veverka's successful track record in expanding Jumbo Interactive from a small startup to a leading digital lottery retailer and software provider, employing over 250 people across Australasia, the United Kingdom, and Canada, reinforces my confidence in his ability to continue leading the company effectively in the future.
I have determined that Jumbo Interactive has a moat. And I feel very confident about management as well. Now, let us analyze the numbers to determine if Jumbo Interactive meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric to examine is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Jumbo Interactive has consistently demonstrated an impressive ROIC, having only fallen below 20% once, in 2015. Notably, the company has achieved a ROIC above 20% in seven of the past ten years and has maintained this level every year since 2019. It is particularly encouraging that Jumbo Interactive recorded its highest ROIC in the past decade in fiscal year 2024, which is a positive indicator for the company's future performance. These figures are highly impressive, given that the ROIC has exceeded 20% in seven of the past ten years, and the company has sustained a ROIC above 40% in the past two years. Many companies never attain a ROIC above 30%, yet Jumbo Interactive has not reported a ROIC below 30% since 2018.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2014 as Finbox only provides data for the past ten years. Jumbo Interactive has successfully grown its equity every year over the past nine years, which is particularly impressive given that this period includes challenges such as a pandemic and various macroeconomic headwinds. Although year-over-year growth slowed from 2020 to 2023, it rebounded in fiscal year 2024, which is a highly encouraging sign.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising that Jumbo Interactive has consistently delivered positive free cash flow every year over the past decade. The company experienced a decrease in free cash flow in only one year—fiscal year 2020—which coincided with the onset of the pandemic, as Jumbo Interactive's fiscal year concludes at the end of June. The levered free cash flow margin has generally remained high, which is a positive indicator. However, it reached its lowest level since 2017 in fiscal year 2024, which is somewhat concerning. Moving forward, an increase in the levered free cash flow margin would be desirable. On a positive note, the free cash flow yield is at its highest level since 2017, suggesting that the shares are currently trading at an attractive valuation. This is an aspect we will examine further later in the analysis.
Another important aspect to consider is the company's level of debt. It is essential to evaluate whether a business maintains a manageable debt level that can be repaid within three years, typically assessed by dividing the total long-term debt by earnings. Analyzing Jumbo Interactive's financials reveals that the company has no debt. Therefore, debt is not a concern for potential investors in Jumbo Interactive.
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Based on my findings thus far, I find Jumbo Interactive to be an intriguing company. However, it is important to recognize that no investment is without risk, and Jumbo Interactive faces several notable challenges. One significant risk for the company is regulatory compliance, given the complex and constantly evolving legal frameworks governing the gambling industry across multiple jurisdictions. Changes in regulations—such as those recently reviewed by the Australian Government regarding online keno and foreign-matched lotteries—could result in increased compliance costs, operational disruptions, or potential limitations on revenue streams. Additionally, anticipated changes to Australia’s Privacy Act and new sustainability reporting requirements could necessitate substantial adjustments to the company’s operational practices, further increasing compliance burdens and costs. Although Jumbo Interactive is proactive in managing these challenges by maintaining strong relationships with regulators and closely monitoring regulatory developments, the unpredictable nature of these changes represents a continuous risk. Any sudden shifts in legal requirements or enforcement priorities could adversely affect Jumbo's business operations and financial performance. Another significant risk for Jumbo Interactive relates to its material contracts, particularly the Reseller Agreements with The Lottery Corporation (TLC), due to their substantial contribution to the company's revenue. These agreements account for 74% of Jumbo's total revenue, making them essential to the company's financial stability. The current agreements, signed in August 2020, have a 10-year term. However, there are several risks associated with these contracts. TLC retains the right to terminate the Reseller Agreements in the event of an unremedied default or a material breach by Jumbo Interactive. Although Jumbo has successfully operated under reseller agreements with TLC since 2005, there is no assurance that TLC will extend or renew these agreements once the current term expires in 2030. Given Jumbo Interactive's heavy reliance on these agreements for a significant portion of its income, any disruption, termination, or non-renewal could have a severe impact on the company's financial performance. Therefore, this is a critical risk factor for potential investors to consider. Expansion and integration present significant risks for Jumbo Interactive, particularly as the company continues to grow through acquisitions, such as Gatherwell and Starvale in the UK and Stride in Canada. While these acquisitions provide opportunities for growth, they also introduce challenges that could affect the company’s financial performance. Successfully integrating these acquired businesses into Jumbo Interactive's existing operations is critical but can be complex. This process often requires aligning the acquired businesses with Jumbo's operating practices, which may involve revising contracts and introducing new terms. Such changes could result in customer attrition or reduced revenue if customers are dissatisfied with the new terms. Additionally, implementing new technology or adapting existing systems to incorporate the acquired businesses can be both costly and time-consuming. If not managed effectively, these integration efforts could lead to increased operational costs and potential service disruptions. These factors contribute to the risk that an acquisition may not deliver the anticipated returns on investment, potentially leading to financial underperformance. As Jumbo Interactive continues to pursue growth through acquisitions, these integration risks are critical considerations for potential investors.
There are several compelling reasons to consider investing in Jumbo Interactive. One key factor is the growing adoption of digital lotteries, as evidenced by the increase in active players from 333.000 in 2015 to 4.6 million in 2024, which underscores a rising preference for digital lottery platforms. Jumbo Interactive's focus on innovation has driven sector-leading advancements, establishing its Oz Lotteries brand as a market leader. The company is strategically positioned to benefit from the ongoing shift toward online lottery purchases, which currently constitute only 40,9% of the Australian market—a figure significantly lower than that of some European countries, where online sales account for up to 70%. With strong partnerships, such as its agreement with The Lottery Corporation (TLC), and a commitment to continuously enhancing player engagement and experience, Jumbo Interactive is well-positioned for sustained revenue growth. This growth is further supported by favorable pricing adjustments and a dynamic jackpot cycle. As the global lottery industry increasingly shifts toward digital channels, Jumbo Interactive's proactive approach and strategic positioning make it a promising candidate for investment, with the potential to capture a growing share of this expanding market. Another reason to consider investing in Jumbo Interactive is its Software-as-a-Service (SaaS) segment. The company's proprietary platform, 'Powered by Jumbo' (PBJ), has become an essential tool for government and charity lottery operators in Australia and internationally. With licensing secured in key markets, such as the United Kingdom, and a strategic focus on expanding into high-potential regions like Canada and the United States, Jumbo is well-positioned to capture a significant share of the growing digital lottery market, which is estimated to be worth $3.1 billion. The SaaS segment has demonstrated strong performance, underscored by notable partnerships and substantial growth in ticket sales. Jumbo's platform not only enhances lottery management but also maximizes fundraising potential for its partners by providing comprehensive services that span the entire lottery value chain. The company's commitment to innovation, strategic partnerships, and continuous platform enhancements ensures it remains at the forefront of the digital lottery industry, supporting sustainable revenue growth for both Jumbo and its partners. Another reason to consider investing in Jumbo Interactive is its loyalty program, "Daily Winners," which was launched in 2023. The program is designed to enhance player engagement, increase retention, and strengthen the overall value proposition for Oz Lotteries' customers. "Daily Winners" offers members access to a benefits platform that provides discounts on essential items, such as fuel, groceries, and technology, making everyday purchases more affordable and rewarding. This program has quickly become a popular feature of the Oz Lotteries experience, driving significant engagement among its most active players. The positive feedback from players underscores the program's success in fostering loyalty and improving customer satisfaction. The recent introduction of "Daily Winners Premium," a paid tier of the program, reflects Jumbo's commitment to expanding and monetizing this initiative. Overall, the "Daily Winners" loyalty program exemplifies Jumbo Interactive's innovative approach to player engagement and serves as a key component of the company's strategy to maintain its leadership in the digital lottery market. The program's effectiveness in driving higher engagement, increasing retention, and creating additional revenue streams further strengthens the investment case for Jumbo Interactive.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,69, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 10%, as the average growth year over the past five years has been 10,4%. Additionally, I have selected a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on Jumbo Interactive's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be AUD 8,85. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Inditex at a price of AUD 4,42 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 61, and capital expenditures were 0,5. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 0,4 in our calculations. The tax provision was 20. We have 69,949 outstanding shares. Hence, the calculation will be as follows: (61 – 0,4 + 20) / 69,949 x 10 = AUD 11,52 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Jumbo Interactive's Free Cash Flow Per Share at AUD 0,96 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is AUD 12,08.
I find Jumbo Interactive to be an intriguing company with strong management. The company benefits from a competitive moat derived from its established partnerships and contracts, a loyal customer base, and regulatory expertise. Jumbo Interactive has consistently achieved a high return on invested capital (ROIC), with particularly impressive performance over the past two years, where the ROIC has remained above 40%. Additionally, free cash flow has grown in nine of the past ten years, which is an encouraging indicator of the company's financial health. However, the decline in levered free cash flow in the past year warrants monitoring. Jumbo Interactive faces significant regulatory risks due to the evolving legal landscape in the gambling industry. Changes in regulations, such as those recently reviewed by the Australian Government, could result in increased compliance costs, operational disruptions, or limitations on revenue. Another critical risk relates to the company's material contracts with The Lottery Corporation (TLC), which account for 74% of its revenue. These agreements are essential to the company's financial stability, but they could be terminated by TLC in the event of a default, and there is no assurance of renewal after their expiration in 2030. Jumbo Interactive also faces challenges related to expansion and integration, particularly concerning its recent acquisitions in the UK and Canada. Aligning operations, revising contracts, and incorporating new systems may result in customer attrition, increased costs, and potential service disruptions, which could affect the expected returns on investment and lead to financial underperformance if not managed effectively. On the positive side, Jumbo Interactive is well-positioned to benefit from the rapid growth in digital lottery adoption. As the market continues to shift toward online lotteries, the company offers significant potential for sustained revenue growth. The Software-as-a-Service segment is another strong investment rationale, given the importance of its 'Powered by Jumbo' platform for lottery operators globally and its capacity to capture a substantial share of the growing $3,1 billion digital lottery market. The "Daily Winners" loyalty program further enhances player engagement, boosts retention, and adds value for customers through discounts and rewards. Its success in fostering loyalty and customer satisfaction, along with the recent introduction of a paid premium tier, demonstrates Jumbo's innovative approach to growth and monetizing its user base. Overall, I find Jumbo Interactive to be an attractive investment opportunity and may consider adding a small position if the stock trades below the Payback Time price of AUD 12.
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