PDYPY - Flutter Entertainment: Strong Momentum - Pullback May Be Coming

Summary

• PDYPY reaching inflection point as big run-up since July 13, 2022 - may be facing ceiling.
• Led by U.S. market, management sees the company being profitable in calendar 2023.
• The stock is likely to find support with NFL playoffs about to begin, but afterward, it may correct on the basis of its unabated price surge.

Flutter Entertainment plc (PDYPY) has been soaring since mid-July 2022, when it was trading at its 52-week low of $43.71, and running from there to approximately $76.50 on January 9, 2022, approaching its 52-week high of $79.93.

Something to take into consideration is back on October 18, 2022, JPMorgan stated the stock has 30.71 percent upside from there, which at the time reflected a low of about $60.00 per share. In other words, the share price is close to the levels JPMorgan (JPM) stated it could reach, and if close to being accurate, it would suggest it's reaching a point where it may be due for a correction.

Now I would have drawn that conclusion without JPMorgan's estimate, based upon the share price now at a double-top of around $76.20, that it seems to me it'll struggle to break through.

Whether it does or not will be determined, in my opinion, by the degree investors believe the U.S. market will contribute to its performance in the fourth calendar quarter of 2022 and the first calendar quarter of 2023.

If investors believe the company hasn't run out of fuel yet, it could make another upward run if it is able to sustainably break through the $80.00 per share mark. If so, I think it'll have enough legs to test the $90.00 per share mark, with the caveat it's not likely to hold because of the need for the stock to take a breather.

In this article we'll look at what the company does, some of its recent numbers, and what the stock is likely to do in 2023.

What the company does

The descriptions below come directly from its ' Q3 2022 Trading Update .'

Flutter Entertainment plc is a global sports-betting and gaming company reporting as four divisions:

• UK & Ireland: Includes the Sky Betting and Gaming, Paddy Power, Betfair and Tombola brands offering a diverse range of sportsbook, exchange and gaming services across the UK and Ireland, along with over 600 Paddy Power betting shops.

• Australia: The Sportsbet brand offers online sport betting and is the Australian market leader.

• International: includes PokerStars, Sisal, Adjarabet, Betfair and Junglee operating in multiple jurisdictions around the world offering a diverse range of sportsbook, exchange and gaming services.

• US: includes FanDuel, TVG, Stardust, FOX Bet and PokerStars brands, offering regulated real money and free-to-play sports betting, online gaming, daily fantasy sports and online racing wagering products to customers across various states in the US and Canada.

Some of the numbers

Total revenue in the third quarter of 2022 was £1,891 billion, up 31 percent from £1,439 million in the third quarter of 2021. Revenue from Sports was £1,14 billion, up 26 percent year-over-year, and revenue from Gaming was £748 million, up 40 percent year-over-year.

The U.S. market became the largest for PDYPY in the quarter, generating revenue of £598 million ($700m), up 114 percent year-over-year, compared to £280 million in revenue generated in the third quarter of 2021. Revenue from its International segment, which included two months of Sisal, was £466 million, up 56 percent year-over-year.

The worst performance in the quarter came from Australia, which generated revenue of £319 million, down 14 percent from the third quarter of 2021. Comps related to lockdowns associated with COVID in the prior year was the major reason for the decline, along with disruption in racing that was related to the weather.

In the U.S. market, the company upwardly revised its revenue guidance to a range of $2.95 billion to $3.2 billion (£2.45bn - £2.65bn); up from prior guidance of $2.85 billion to $3.1 billion (£2.3bn - £2.5bn).

Adjusted EBITDA is expected to be in line with prior guidance of $300 million -$360 million (£235m - £285m). The early launch of Maryland isn't expected to have any immediate impact on adjusted EBITDA for full-year 2022.

As for outside the U.S., adjusted EBITDA is also to come in at previous guidance of £1.29 billion to £1.39 billion.

Management said that guidance is based upon no visible slowdown in consumer trends in the sector as of the time of the release.

The cost of debt will jump in 2023, from 4.1 percent in the fourth quarter of 2022 to 5.6 percent in 2023, which would boost interest costs to £280 million in net cash.

The company has total cash of $1.83 billion, total debt of $5.25 billion, and levered free cash flow of $2.03 billion.

It shouldn't have trouble paying down its debt, but if scale results in the company turning a profit, it's going to be a significant catalyst for the company in 2023.

Momentum

The key question concerning Flutter Entertainment is whether the stock can maintain momentum as the company stands today, understanding there are numerous new pieces of the puzzle that will be added via acquisition, and in the U.S. market, new states that will eventually legalize sports betting.

But in the near term, the company has soared since mid-July, and I'm not seeing much in the way of new catalysts that would justify an ongoing upward move in the stock, outside of a possible, temporary boost from the NFL playoffs, which wouldn't likely hold once they're over.

Even though the company spends a lot of marketing, its belief that the growth in the U.S. market is going to carry it to profitability in 2023 would be a significant tailwind if it plays out that way. But with no discernable change in trending momentum, it's possible it may reach that guidance.

What I want to see is how the U.S. market does after the NFL playoffs. How much growth in the U.S. will it need to reach profitability? Of course, if it has a blowout first calendar quarter of 2023, it could be a big boost to the company, resulting in it attracting many more users, which in the U.S. stood at 1.86 million as of the third quarter of 2022, up 42 percent year-over-year.

A secondary factor concerning maintaining momentum would be acquisitions in the near term, although growth and momentum in the U.S. market will be the key to outperforming in 2023.

Conclusion

If PDYPY was trading lower it would be a no-brainer to take a position in the company, but since has soared from $43.71 in mid-July 2022 to approximately $76.50 on January 9, 2022, coming close to reaching analysts' target price, it's getting to the point where I see the stock needing to correct in order to justify taking a position at this time; there simply isn't enough upside left to offer a good risk/reward scenario for potential investors.

That doesn't mean the share price of the company won't break through the $80.00 level on a sustainable basis, which I believe it must do if it is to find a higher bottom and higher top, because it could. My concern is that I think everything is already priced in, with the possible exception of the company maybe becoming profitable in 2023. But that has yet to be proved.

I like the overall momentum of the company and its potential future growth trajectory, but I would be cautious at taking a position this price. I think waiting for a strong pullback in the share price would be the best way to play the company, because there's little that investors don't already know concerning its potential performance over the next 12 months, based upon the businesses it now operates and its fundamentals.

This is the type of company I would wait for a good entry point, and then hold for the long term and let time do the heavy lifting. I think Flutter has a good future ahead of it, but in the near term it needs to take a breather, and with the stock trading at this level, it wouldn't surprise me to see shareholders start to take some profits off the table; as a matter of fact it would surprise me if they didn't.

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