DIS - Flutter: FanDuel Should Hold Dominant Market Share Against Deep-Pocketed Entries

2023-10-25 13:56:45 ET

Summary

• Flutter Entertainment plc stock is currently priced at $75.37, with a 52-week range of $60.32 to $105.
• The company has a market cap of $26.62 billion and an EPS of $2.74.
• Analysts have a consensus price target of $115.94, and the overall view is to buy with a target of $107.75 by the end of 1Q24.

Flutter Entertainment plc (PDYPF), (PDYPY) $75.37 at writing:

52-week range: $60.32--$105.

EPS: ((FWD)) $2.74.

P/E ((FWD)) 27.52.

Market cap: $26.62.

Consensus Price Target ("PT"): $115.94.

Our take: PT is nearer than what may appear to be a long haul north. Our PT by end of Q1 2024 is $107.75. Our overall view: BUY with analyst consensus at $115 reached by early Q2 2024.

Above: We like the buy on the dip play right now.

Rationale:

PDYPY, having the leading market share for its U.S. FanDuel site, is the globe's biggest online betting operator. Its management has balanced risk to any of its key markets by using its dominant position to keep marketing spend in control despite local pressures.

Above: Overall in US and globally, Flutter leads in revenue growth.

FanDuel, one of two sites which immediately dove into sports betting from their fantasy sports base - DraftKings Inc. (DKNG) was the other - has achieved positive U.S. EBITDA faster than all competitors. They have leveraged their leadership wisely, bringing its know-how from its deep operational experience in all global regions: U.S. & UK, Australia, Ireland, EU, and Serbia with U.S. FanDuel revenue contributing 34% of global sales which TTM has reached US$9.5b up 14.64% y/y/. There is no online sports and iGaming operator that leads in the U.S. with revenue anywhere near PDYPY's FanDuel platform.

Though far apart as sectors with entirely different dynamics, we still present the analogy of Apple (AAPL) smartphones. Despite the similarly crowded sector, Apple commands a 56.4% share of the U.S. phone market. That is the result of longstanding consumer loyalty and the tribal nature of the Apple customer base. We see similar characteristics in FanDuel.

Over the nearly five years since the opening of legal sports betting, players have had immense opportunities to shift loyalties based on the richness of deals presented by all competitors. Fickleness is a characteristic of gamblers when new markets open and vie for their business with siren calls of crazy, free deals. But in time, two factors intrude.

One is luck perception. Gamblers are superstitious, and many more than you think believe in the old mush. Once, during an NFL playoff weekend event at my casino when the sportsbook was mobbed, a NY Giant safety intercepted a long pass and took it to the house. The Giants took a 3-point lead. It was the third quarter. A player shot up from his seat screaming YES! Punching the air, he shouted, " We got this-game over baby!"

Two other players immediately surrounded him. "You idiot, you're touching the money you bleeping mush! They proceeded to upbraid him for breaking one of the cardinal rules of sports betting. Needless to say, the Giants lost. Nearly every Giant fan in the sports book passed him, and accused him of mushing the outcome. By the way, one of the loudest of his accusers was a regular. He held a PhD in computer engineering from Stanford. So what we have here is a mature customer base, comfortable where they are playing, believing that their success in betting is connected in some way as to where they place their bets. This is the moat of all moats, no amount of free deals can dislodge this after five years.

Their abiding tenet: never touch the money . The warning originates from old-time poker players, who, having what appears to be winning hands, reach for the pot prematurely only to feel a sudden hand camp down in their forearm from another player with a better hand that fooled the table.

As I have observed over the decades, once gambler patterns are established they tend to become immovable. Sports betting market shares have shifted somewhat, particularly among the second and third-tier operators including the key casino operators like MGM Resorts International (MGM) and Caesars Entertainment, Inc. (CZR). But overall, the two leaders sprung from fantasy sports origins, were able to maintain leadership by infusing their sites into the habit patterns of bettors after five rough and tumble years.

Challenges will continue to the leaders, but we believe, drawing from our long-on-the-ground experience and knowledge base about gamblers and their needs, that they will remain largely where they are. Clearly they deal hop when competitive platforms throw rich free bet deals at them. But that has begun to wane, as our associates relate. Dislodging significant chunks of market share from PDYPY will be extremely costly and take commitments over a long time.

As to the two deep-resourced newbies coming on, the core questions from bettors will arise:

Q: What can you offer me that FanDuel can't?

A: Basically nothing. In the case of Fanatics, they will leverage their merchandise as reward fodder for certain. It may have a short-term impact, but long term it will mean little. Note the difference in expectations between the statements of Fanatics CEO Rubin, who has predicted his site will eventually be #1 in share, and his new CEO< Matt King.

King, (formerly of DKNG), whose take sounds a lot more like real-world thinking, resonates with reality. He forecasted no massive share poach, no quick fixes, but admitted there was a long road ahead to present a viable product and market it sensibly. Nothing about share leadership. His take is smart. Fanatics is very likely to carve, at best, a decent single-digit share over time. Could range between 2.5% and 3%.

Fanatics says it has 96m customers, of which the largest single age group is sports betting demo gold ages 23-34 male. It also says it will confine its initial marketing efforts to programs tied to premium giveaways of its gear. Good thinking. But, as always, we believe that there is no guarantee of crossover from people who buy sports gear to those laying down bets. We cite this using the Penn Entertainment ( PENN ) model.

Penn's target in buying Barstool Sports was to graft the big-time sports database of its 55m stoolies onto its online site. It appeared as a low-cost marketing tool. The degree to which stoolies opted in to bet on the site was relatively modest. The best result was that it did spark a migration of younger betting demos to Penn casino sports books. But in the end, Barstool Sports book was only able to attain a low single-digit market share overall nationally. This proved that the Barstool mass contained a lot of empty calorie data of people turned bettors. It had value, but nothing near what one would expect from a 55m database. At any rate, Penn/ESPN will begin with at least a 1,5m customer base-a good start, but overall limited.

BetESPN is late to the party-very late-four years too late. The Walt Disney Company (DIS) fiddled with the idea from day one. Internally, there were executives at all levels that rejected ESPN betting as a blemish on the Disney family image. Secondly there was a stubborn resistance to selling the unit-the most logical move and the one still favored by activist Nelson Peltz. Third, there was the pretense that the bettors would wait with bated breath for an ESPN entry. It has 27m subscribers. In the view of the Disney partner, the $1.5b Penn will pay over ten years for promotional and media exposure to ESPN viewers will provide a smooth glide to a strong market share eventually.

ESPN subscribers and available homes have been in a tailspin over the last five years. Viewers have tired of the endless panel blabber shows where former athletes, coaches and garrulous hosts chew through meaningless woke tropes between games,

In brief, ESPN is a field with a few clusters of diamonds here and there like Monday Night Football, some baseball, NBA games, hockey and a smattering of college football and hoops. But the overwhelming bulk of its air time is wasted on fringe sports and the blabbering minions of hosts on their marathon pre and post game shows and so-called controversial hosts appealing to essentially worthless gambling audiences. It is a field of zircons. BetESPN can do some business, but overall we see a single-digit market share at best on the way. Had Iger and his Disney minions not diddled for so long, an early mover entry by ESPN in 2019 or so, could have been huge.

So, investors who now buy the hustle of Iger that the lash-up with Penn is destined to achieve a major dent in the market share of platform leaders like PDYPY are on a fool's errand. Save your money and buy into what we believe is the fortress of U.S. sports betting, PDYPY. Bettors are essentially now in the comfortable arms of sector leaders, none stronger than PDTPY. I believe that now, into the first weeks of the NFL season, there are already signs of double-digit growth in betting revenue. FanDuel has the substance and resources to defend and, in fact, probably increase its market share beyond 47%.

Above: Moving toward the center of the NFL season, we see sales growth continuing into double figures through early next year.

That's because what looms on the horizon is a FanDuel IPO to be NASDSAQ-traded that will further reinforce its leadership.

The FanDuel IPO

Flutter has teased its intention to float a NASDAQ-listed IPO for over two years, but it has stalled due to an option it long ago gave Fox Sports to acquire 18% of the U.S.-traded equity whenever it debuts, Disputes over valuation eventually went to arbitrators who fixed the option value at $3.72b. This values FanDuel at around $20b. There is no set date for the move yet, but we believe the imminent entry of the two deep-pocketed challengers will speed the proceeds ahead. This will be a big catalyst for price appreciation for the pure play that will result in the public issue.

Conclusion

We like PDYPY as a strong sector leadership buy which will gain considerably as the sector moves to a $20b to $25b revenue goal by 2030. The rationale has brought it the biggest market share, and its forward prospects as a US-traded equity sometime in the near future add to that value.

At its current price, Flutter Entertainment plc stock is a STRONG BUY.

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