The Jumbo Interactive Ltd (ASX: JIN) share price has soared about 300% higher over the last year. Where will it go from here?
What Does Jumbo Do?
Jumbo is a leading digital retailer of official government and charitable lotteries. Jumbo owns and operates the Oz Lotteries platform (website, apps etc.) where over two million Australians (and growing) currently have an account.
Jumbo currently generates the majority of its revenue from re-selling lottery tickets supplied by Tatts Group, a subsidiary of Tabcorp Holdings Ltd (ASX: TAH).
Why Has The Share Price Soared?
The Jumbo share price has raced higher since announcing 2019 Financial Year guidance in February, in which they outlined huge growth in projected Total Transaction Value (TTV), revenue and net profit after tax (NPAT).
Specifically, they expect TTV to be up 62% to $296.4 million, revenue up 53% to $60.8 million and NPAT up a whopping 107% to $24.2 million. The above mentioned NPAT guidance was reconfirmed by Jumbo last month.
Jumbo did admit it has benefited from an increased number of ‘Large Jackpots’ which greatly increases lottery ticket sales. Large jackpots are defined by Jumbo as OZ Lotto/Powerball Division 1 jackpots of $15 Million or above.
Room For Growth?
Within Jumbo’s half year results presentation, they advised 21.5% of Australian lottery tickets are now sold online. However, online market share is higher in other countries, with the U.K. at 24% and the global leader, Finland, at 48%. Online share of lottery tickets is steadily rising in Australia, with Jumbo expecting this to reach 25% next year.
Jumbo has invested heavily in its software platform, leading to 199,410 customers opening accounts in the first half of 2019. Jumbo also announced it has begun selling its platform to lottery providers in the form of Software as a Service (SaaS). This alone could be a significant source of growth in future years.
Are Jumbo Shares Extremely Expensive?
Jumbo’s share price is $19.80 at the time of writing, with the company having a market capitalisation of $1.18 Billion (Source: Reuters).
Based upon guidance provided of FY2019 NPAT of $24.2 million, shares trade on a very high price-to earnings (P/E) multiple of 48.7. However, the current P/E is not very useful for assessing the value of a rapidly growing company.
For a very rough estimate of what Jumbo Shares may be worth in 5 years, we can estimate the company’s 2024 profit and apply a “reasonable” P/E multiple.
Jumbo has grown its NPAT at a compound average growth rate (CAGR) of 31.6% over the past five years, far exceeding revenue CAGR of 9.6% over this period. Profit margins have continued to expand as the business has scaled. Based on the above, I think NPAT could grow at a CAGR of about 20% over the next 5 years, reaching $60 million by 2024.
According to Reuters, Jumbo’s P/E has ranged between a low of 7.43 and a high of 53.59 over the last 5 years. We will use the midpoint of the two, 30.51, as our “reasonable” multiple.
Applying a P/E of 30 to forecast NPAT of $60 million, Jumbo’s market capitalisation could reach around $1.80 Billion by 2024. This implies the share price could rise around 50% over the next five years, with an increase of roughly 9% per year. Personally, I would like to achieve a return of at least 15% per year.
Although Jumbo shares are not at bargain-basement levels, I will certainly keep them on my watch list.
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Disclaimer: At the time of writing, William does not have a financial interest in any of the companies mentioned.