2023-06-16 18:41:36 ET
Summary
- The UK White Paper of gaming reforms were far less draconian than feared regarding a threat to U.S. platform revenues.
- The White Paper risk baked into the price by many investors has been dramatically diminished by the actual reforms to come.
- The U.S. industry needs to be proactive here. Flutter Entertainment plc will have experience of new regulations as they begin in 2024.
March 27, 2023, we published a bullish outlook on the shares of Flutter Entertainment plc (PDYPY, FLTR:LN), the U.S. unit of the global online betting giant Flutter Entertainment. The price that day: $87.67.
Above: Now that the White Paper reforms are known, a bearish element has been removed from an overall valuation of the stock.
The price at writing: $99.95 The stock is up 13.08% since our call vs. the S&P 500 (SP500) up 10.48% and slightly off a month ago at $103. We see an immediate entry point here on the 8% dip as a buying opportunity. A key bearish element baked into the longer-term outlook of the stock is now essentially tamed. And for that reason, we are moving our price target ("PT") beyond analyst consensus $108. The lack of upside movement we believe, in part, has been due to some wariness about the issue of the long awaited and feared UK White Paper on gambling reform.
Our revised forward PT to late Q3 2023 - $114 - is a play with a low double-digit upside, but one that anticipates the inevitable IPO of the stock trading on the NASDAQ. That would be the first time the sector-leading site FanDuel Group would be trading on its U.S. prospects ahead.
On the bear side, we had seen sentiment among some investors to pass on the stock because of recurring losses due to overheated marketing in the sector in general. Add to that the continuing bottom line losses. Some investors also bemoaned the lack of dividends to make up for the dead pooled price range at which the entire sector was trading.
What's changed
Since my last outlook on PDYPY, what we believed to be a baked-in bear risk has essentially been removed on this leadership stock in the sports betting space. And it was one reason the stock may have kept wariness about its prospects at a higher level. It sprang from the concern that the UK White Paper would be a devastating blow to the sector by recommending draconian reforms in everything from tax rates, to irrational bans on betting limits to virtual curtailment of all advertising as being predatory.
For an industry in the early stages of approaching profitability, the potential damage to prospects was scary. Implied in the process was that the UK paper would spur U.S. regulators to urge legislative bodies at the state and national levels to enact massive reforms. Such reforms, taken to the edge, could have crippled the industry.
The bark was worse than the bite
In late April of this year, the UK finally issued the long awaited White Paper (the "Paper") recommending further action by the Gaming Commission to curb abuses of at risk player segments by imposing stricter enforcement rules on the industry. The nightmarish scenarios feared by operators simply did not find their way into the final study that will initiate reform. We don't suggest that it was a walk in the park reform template at all. There are many aspects of the paper that will catalyze reform efforts in the U.S. The reason is related to what industry critics point to as dramatic increases in the numbers of problem gamblers and potential intrusion via online savvy of juvenile bettors running up debts on parent's credit cards.
The central recommendations
Initially, the Fan Duel parent, Flutter Entertainment Ltd. will be tasked to adapt their operating policies to reflect compliance with the spirit of the Paper's conclusions as well as live by final legislation that will follow.
The majority of the reforms recommended, ones we expect to end in stricter enforcement and new legislation, deal with the heightened risks created by digital access to gambling sites and businesses.(Ironically, at the same time, the study group has approved the legalization of live sports betting at UK casinos.)
The core recommendations are aimed at these areas: betting limits, creditworthiness investigations of patterns of abuse, increased transparency by platforms assisting regulators, data protection and digital advertising and promotion. All these protections can either fall into what platforms are already doing or increase the urgency of closing possible abuse.
The study believes there are 300,000 addicted gamblers in the UK, with another 1.8m people at what they call "elevated risk" in terms of their betting patterns. Latest U.S. estimates are that there are anywhere between 2m and 4m problem gamblers in the nation and that the figure has grown by 30% since sports betting was legalized in 2018 according to the National Council of Problem Gambling. The clear message here is for the U.S. industry to be proactive before the Paper's conclusions drift their way into U.S. legislators.
There were six core recommendations that at some point could find their way into U.S. sports betting state rules:
Betting limits by age. The UK recommended slot players under the age of 25 be limited to bet 2gpb. Players in general who have lost more than 125gbp a month or 1,000gbp per year or 2,000gbp within 90 days would be subject to enhanced check of their overall credit status to include ratings, court records regarding personal debt, etc. Customers in the 18-24 age group would be subject to enhanced checking based on betting patterns. Stricter enforcement and curbs on illegal sites, and cross-over cooperation between governments to identify problem gamblers who play legal and illegally. There will be a tax on platforms to help fund expansion of the Gambling Commission's investigatory capacities in strong cases of gamblers getting in over their heads.
Advertising: Ads and promotional bonuses, especially those shown on digital media appealing to the young, will be curbed in terms of rethinking marketing tools like free bets, borderline harmful content, heightened responsible gambling warning campaigns, intervention procedures when serious cases arise. Reporting standards. In this, the study recommended options which begin with self-regulatory policies and move toward a statutory commission charged with the total oversight of the digital gaming space-only as a consideration for now. Recognizing the cost and problems associated with the formation of a separate commission, it appears that the study favors stricter self-regulator modes. Increased digital surveillance by platforms to keep underage gamblers off the site and when discovered, have tools to trigger interventions by families. Work with industry associations that have created codes and policies to build up their digital tool kits for earlier detection of abuses. Credit checking on players with clear patterns of addictive action over ever smaller duration between plays.
The recommendations were targeted to cover what the Paper characterizes as sites with "Strategic Market Status," which of course means the majors, the biggest of which is FLTR.
The overall impression of industry leaders here in the U.S. is that, while regulation reform always contains risk over overshooting original intent, it found the recommendations falling within a reasonable level in terms of enforcement. The central concern before the Paper was published was the imposition of total betting limits across the board, whether the player showed he or she was at risk or not. This has not materialized.
Will the U.S. implications of the White Paper kill the FLTR IPO?
Flutter archives
As may be expected, Flutter's statements after the White Paper dropped were highly positive, yet not without hard-edged impact. Firstly, the reforms of the 2005 Act that was the reason for the study, do not go into effect until 2024. FLTR estimates that the betting curbs could result in a loss of gbp200m to gbp250m in 2024 revenue once the curbs are fully in. On a ttm basis, FLTR revenue comes in at ~US$10b.
From the perspective of a potential U.S. investor, these reforms there is nothing here, based on what we now know, that could kill the expectation of FLTR beginning to trade as a NASDAQ IPO in terms of the company's ongoing plans. In fact, it could be seen as a positive. The FanDuel unit, which is already over $2b and heading higher with an estimated averaged 35% market share for 2023, says it expects to turn profitable before the end of this year. That projection assumes its averaged hold percentage over the year remains at the 7%--range.
Our view here is that Flutter, as market share leader with at least 4 new states coming online as of 2024, plus the ongoing acquisition of new customers in existing states, tells us that a position now in the shares of PDYPY are among the best bets in the space now. We are calling a BUY here.
The IPO will represent a pure play, as is DraftKings (DKNG), its nearest competitor. On an apples-to-apples basis, we like PDYPY better because its IPO will enter as a market leader. This is a somewhat rarity, as most IPOs enter as a wing and a prayer - big expectations at a presumably cheap entry price.
If and when U.S. regulators begin to consider the possibilities of revising sports betting codes to reflect tighter controls on those areas of potential abuse in the digital side, investors will already have a measure of possible impact based on reading the UK results of FLTR.
The sector is headed for consolidation for certain. So, we do not rule out the possibility ahead of a U.S. traded FanDuel acquiring third tier operators with specific footprints in areas they believe will augment their total addressable market.
For further details see:
Flutter Entertainment: U.K. White Paper Makes This A Better Bet Despite Reforms