CZR - Flutter Entertainment: This Global Online Betting Leader Has The Top U.S. Share

Summary

• FanDuel's grip on market share leadership will remain and continue even after a possible spin off by Flutter.
• We're revising our long range sports betting revenue target to $50b by 2026 or before. This would make FanDuel a $15b business.
• As a global leader, the real value of FanDuel is disguised inside the strong overall sales growth of the parent.

“ It was one of those periods of ecstatic derangement in the financial world when, for a brief time, everything seems possible, the miraculous becomes mundane, the outcasts are left in, the infirm walk…” Connie Bruck, author of The Predator’s Ball.

It is nearing five years from when the U.S. Supreme Court overturned the PASPA law and set in motion the explosion of legal sports betting in this nation. The half decade since has been a period akin to a gold strike in the Yukon in the 1840s. And like that period, it has been crowded with adventurers from all over the world. They’re all still racing to mine customers with overheated promotional giveaways. But happily for investors, the rate of marketing spend is starting to slow down to the benefit of the entire sector’s future. It’s time to be long on our top pick in the sector:

Flutter Entertainment plc ( PDYPY ), on the U.S. traded OTC.

Many investors have been left with failed dreams of quick wealth, having listened to some analysts forecasting a $200b market by 2025. Some who bought into the dream early and got out, did well. Other true believers held on and got killed. DraftKings, Inc. (DKNG) stock soared to $72 in 2021 and has since fallen to under $14.

Some true believers held on, but lightened positions. Among them, Cathie Woods’ Ark Investment Management, after having sold off 368,418 shares in 3Q22, has left the second-largest position among DKNG’s institutional holders, with 24.7m shares valued at $322m. Other top holders are Vanguard and Black Rock, both of whom are holding on to DKNG positions at this writing.

We cite DKNG because it is a pure play in the space among the leaders, not a unit of a parent casino such as BetMGM ( MGM ) or Caesars Sports Book ( CZR )—both top tier operators.

The inevitable shakeout has now positioned the sector to enter a Phase Two this year where sheep and goats will separate, and crazed promotional spend declines. The battle for market share in new and mature markets has evolved to show that the four leaders are controlling ~65% of the total revenue per month, with all others fighting for the leftovers.

Above: Long range, it's all arrows north for Flutter.

Among the biggest kahunas in the country thus far are New York State, New Jersey, and Pennsylvania. (Notwithstanding its insane 51% tax rate on online gaming, New York state has clocked a better than average hold.)

Since May of 2018, the three big states have generated impressive handle:

• Pennsylvania: $18.1b in handle winning $1.4b hold at 7.8 %
• New Jersey: $32.6b in handle winning $2.2b holding 7%.
• New York: $15b in handle, winning $1.2b, holding 8.4%.

(Note: NJ, an early entry into the sports betting fray, shows how time plays one of the roles in hold. Long-vetted stats show that over decades the expected normal hold on sports bets is 7%. That is the long range expectation best used to value shares companies in the sector revenue projections.)

The grand totals during Phase One of this industry (2018 to YTD date) are nevertheless top line impressive for investors:

Over the near three years in action, here’s the cumulative:

Total handle $181.4b

Total win: $13.7b.

Hold percentage 7.6%. So you can see across all 28 states in action and two more imminently opening, that the hold percentage is moving towards the long range mathematically proven edge built into the odds making systems decades ago.

Phase Two: Time to pick the winner and go long, go to a pleasant sleep and wait for solid returns ahead. We confine our best bet to tier one platform stocks due to the disproportionate share they own of the total market. It’s all about scale in this sector . Tier two and three sports betting stocks have their place in the sector, but the 10 companies that occupy those tiers are all single-digit market share companies and probably subject to considerable consolidation over the next five years. Below: Flutter's multiple platforms include the best performing brands in the sector.

Sports betting benefitted from the pandemic in 2020 for certain with people stuck at home. Now, as we enter the early post-pandemic era, the key to the kingdom is betting on scale as we face a probable recession.

Interlopers: Investors need to be aware about possible market disrupters peeking around the corner. First, Fanatics, the privately-held online marketing of team apparel whose announced entry into the sports betting fray may come by 2Q23 as a SPAC entry. Second, and this one is the real funny joker, is ESPN, on the assumption, not clear at all yet, that Disney at some point will wake up from its long snooze, and put up the for sale sign on the network.

If that happens, expect ESPN to either buy one of the second tier operators or decide to go at it alone. The sudden intrusion of activist Nelson Peltz into Disney ( DIS ) probably heightens this prospect by pressuring Robert Iger to abandon the hamada, hamada, hamada position of his prior statements (and those of interim successor Bob Chapek) and sell ESPN.

Either way, both these entries can disrupt. But they will both be very late to the party and because of it more likely to buy one of the medium sized operators and recast it into ESPNBETS. Neither of these developments is likely to bruise our choice stock in the sector because Flutter is just too deep in data, too big in scale, and probably not far away from the biggest move of all, spinning off FanDuel.

Our choice: FLUTTER ENTERTAINMENT - U.S.-traded

Price at writing: $150.10

52- week range: $88,30--$163,48

Market cap: $26. 4b

All time high: 4/21 $205.11

Our PT: By 2Q23: $183.50

FWD P/E: 29.07.

Return over the last 5 years of parent FLTR: 41%. Its revenue in that period grew 33% a year. Strong revenue growth will continue on the back of FanDuel’s stunning U.S. performance.

The total TSR over those five years has been 7%

UK/Ireland-based Flutter Entertainment is by far the biggest online and live sports betting and iGaming platform on the globe, generating over US$6.3b in global revenue, of which FanDuel’s U.S. business contributed - by company numbers - $2.9b to $3.2b in revenue for 2022.

In 2Q22, FD was the first to show a quarterly profit, clocking US$22m for that period. Its expectations for fiscal 2022 would show a shrinking loss to ($300m). We have put company forecasts for 2023 to our own tests and believe Flutter U.S. will show an overall profit for the year in the U.S., while most competitors, while reducing promo expense, are still likely to remain net losers until mid-2024.

One of the foundational rationales for being long in PDYPY stock is the inevitable spinoff of the U.S. market leader FanDuel, which has been variously valued at between at $11b and $15b according to various calculations, roughly half the current market cap of the parent. Another is its global strength.

Market shares U.S.

Corporate claims as to market share by state vary widely. Sometimes within a single month we can see one platform outperforming another by mid-single digit in bets taken, and others the reverse. Promo deals play a role. Overall it is fair to state that FanDuel is without question the leading platform in the sector, with a realistic market share somewhere between 37% and 42% overall. DraftKings is second with a range between 22% and 29% nationally adjusted.

The next two are casino operators. BetMGM, 50% owned by it and UK-based betting giant Entain. MGM continues to press its desire to acquire Entain. (We think that is very much a possibility this year.) Fourth is Caesars Sports Book, very strong in the big kahuna states. Both companies have an overall market share ~15%. That leaves the rest of the pack with single-digit shares, likely to grow in total with the size of the market but still hold relative single-digit shares.

In Flutter, you get the “unpaid” bonus, if you will, that an ultimate spin off of FanDuel which would make it the single biggest pure play in U.S. sports betting, and holders of record are bound to receive a premium in the process at one point or another. So, being long now in Flutter provides the ballast of a global leader in sports betting, a dominant share leader in the burgeoning U.S. market, and a track record of performance by the parent that should be comforting to holders.

The market by 2026

Above: FanDuel is entering the most profitable quarters of the season, due primarily to the NFL playoffs, Super Bowl, and rising NBA interest.

We have assiduously followed the pace of legalization, revenue flows, market shares and platform improvements by the leaders since legalization. In looking at the trends ahead, we have projected a market anywhere between $25b and $33b by 2025/6. JPMorgan has been close to this appraisal as well. One of the difficulties of looking at forward revenue projections in sports betting is the continuing unknowns about states not yet legal but possibly going legal by 2025.

A second question arises as to the performance of the most recent states to join the party: Ohio and Massachusetts, Ohio being the gem of the two because of its demos and its presence both in pro and college sports. It has six pro sports teams, the monster Ohio State college football team, and 40 more Division One college teams. Fan fervor is high, betting volume should follow. Massachusetts has 4 pro teams and a far less fervent college betting scene, though it is rich in campuses, with fan passion in particular for the Red Sox and Patriots.

Our operating assumption here is that the biggies like California and Texas are totally unpredictable and can’t yet figure in forecasts of addressable markets.

I have done a deep dive into statewide demographics looking for the maximum number of people with a strong generational sports betting profile and come up with an addressable market of ~40m of real, regular bettors.

On that basis, I am now raising my original forecast for total gaming win by 2026 to $50b. Assuming existing shares of market hold steady, i.e., a few points up or down, I think a realistic forecast of FD revenue for 2026 with a share of 30% would translate to a $15b business throwing off a gross profit of somewhere around $7.2b.

We can’t realistically forecast an EBITDA number since we are dealing in essentially a low margin business made or broken by the skill sets of management in cost efficiency, capex needs, and technology mini- moats ahead. Thus far, we see this as a Flutter strong suit given not only their U.S. success but their similar strong performances globally. What remains an issue for the parent, of course, is the imminent effect of new UK gaming regulations that put strong breaks on amounts of best and other curbs on gaming to curtail the spread of problem gambling.

Conclusion

Sector leadership counts, always, as to a great extent it puts on display the differences in management skill sets among peers. While all peers in sectors that survive long term do bring good operating abilities to their businesses, some are always more nimble, more creative, more innovative in their outlook than others. We believe at this point, that on all counts, the U.S.-traded Flutter shares (FanDuel, in essence) promise the best possible returns to investors among all peers. DKNG remains steady at number two, but we need to see more cost discipline ahead than what we have seen to date.

This is no rap on the other two top tier platforms. But while sports betting both live and mostly online represents a superior sales growth opportunity for both MGM and CZR, their bread and butter will always be the brick and mortar casino businesses. Right now, both are going gangbusters as the early post-pandemic period peeks around the corner and Vegas is roaring hot every weekend.

But in our view, even at its lofty price, Flutter Entertainment plc represents as sure a lock as you can bet on for a stock with the sunniest future in sports betting over the next five years.

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