Flutter Entertainment: Its All About Scale In The Sports Betting Sector (NYSE:FLUT)

Above: Trading on the NYSE has given the stock a far deeper penetration into the US retail and institutional investor pools.

The transition of FLUT from trading in London to the NYSE in January signaled a coming bull scenario which we alluded to on February 7th in our Seeking Alpha post that day. For context here’s its recent ramp post-NYSE transition:

Jan. 12: $158

Jan. 18: $192

Feb. 7: $217 (The day of my Seeking Alpha post)

Mar. 12: $221

Price at writing: $197 – early profit taking appears – an entry point we like.

Our thesis pre-NYSE and going forward is that FLUT, by far the largest international online sports betting platform, will continue to benefit from its scale against peers. And in a fundamentally low margin business, the key to sales and earnings growth can only come from scale. The spearhead of its market leadership is the US’s #1 sports betting entry, Fan Duel. Its overall share of the market (NGR, or net gaming revenue) has been variously estimated between 47% to 50%.

However, in some markets, the #2 operator, DraftKings (DKNG) comes close to a tie, and in a given month may rise to a marginal #1. What is clear is that these two operators so dominate the sector, that their combined scale owns over 70% of the total US market. DKNG’s 2023 revenue grew a powerful 63% booking an operating loss of ($789.2m), down from ($1.5b) y/y. Total cost of revenue was still up by 57%. Yet DKNG’s marketplace strength brought sales of $3.66b. For DKNG, scale also remains the tent pole of its growth. We expect it to turn profitable sometime by 2Q or 3Q this year.

By comparison, FLUT’s sales growth since 2018 dramatically shows the runaway position of scale in revenue growth. Its global reach as well as US leadership is the key:

FLUT sales growth

2018: $2.39b – In May, the SCOTUS decision opened the US.

2019: 2.83b

2020: 6.04b Covid catalyst

2021: 8.1b

2022: 9.3b

2023: 11.75b

2024E: 11.7b

2025E: 13.38b

3 year averaged revenue growth (CAGR) 50.83%.

This does not materially bake in the possibilities of large scale new legalizations in the US (Texas, California, neither imminent). But it does reflect an immense catalyst in the further activation of FLUT’s betting platform in cricket and rummy-crazy India. The addressable market there is literally infinite compared to most other nations.

Above: Stock will move with the NFL season.

Earnings history and projections FLUT

We expect FLUT to turn profitable this year. It may show a profit in Q2’24 if not already in the black.

EPS 2023: $4.94 P/E 44.31 YoY +27.78%

Est 2024: $7.45 P/E: 29.37 YoY +13.3%

Est 2025: $10.38 P/E 21.0 YoY 14.8% +11.99%

Market cap $38. 18 at first writing

The clear propellant of growth for FLUT was the rapid ramp of Fan Duel in the US. While much of that growth was fueled by a sequence of rapid legalization in new states, FLUT’s easy site navigation also played a role in player retention. The sports betting business as we have noted in prior posts begins with a historical hold percentage average of 7% on bets. Sports results can waver dramatically up or down from that baseline. A look at the FLUT hold percentages for the two prior months just ended reveals these kinds of swings:

Jan. win rate: 16%

Feb. win rate: 4.9%

Note: Despite some months with very wide swings in win percentages as low as ~2% US revenue in a given month was up dramatically. What this shows is a basic working reality of the gambling business that not all investors understand. It is of course scale. This not only appears in online sports betting but shows up in casino wins as well.

In my archived data set, the drop and hold percentages of 100 shifts of table play games over time, I picked these examples:

Ex:

One day: The hold percentage was averaged at 15% showing a win of $750,00. Another day I compared that with a larger drop with a lower hold of 9% due to five big lucky players. Our win was $8,100m. So clearly part of what a gambling entity wins in a given shift or day of games depends on player mix. But what is irrefutable is that the pursuit of scale is the only anecdote for lucky play. Conversely, the house can also play lucky against the players if certain heavily bet games go against the player sentiment. As is shown above by the month FLUT held 16%.

FLUT win rates of course come from both its US and global business. By contrast, most of its peers are US-only. But the underlying math of sports betting odds always prevail no matter where a bet is placed. So we see the gyrating pattern of hold across the entire sector. The same game outcomes affect all as betting patterns are the same in terms of similar, but not always identical odds, regional favorites, etc.

FLUT says that as of its Q1’24, its growth margin is 51.86

Above: Tech analysis looks positive on many fronts. Seasonality is key to the entry point from here on in.

The investment thesis: FLUT forward ramp is all about scale

Any look at the sports betting sector must conclude that on a tech stack basis, on player friendliness, and on innovative betting propositions, most all of the platforms are fairly equal. However, the gambling ETF Eilers & Krejcik has studied the sector constantly following the growth arc since legalization. I have indicated that Fan Duel market leadership is related to its superior functionality.

Not all bettors on other platforms may agree as they remain loyal to DKNG and others. But tracking the growth of scale in Fan Duel does suggest there is something to that judgment by EK. We summoned opinions from our industry colleagues to determine how widely held was the view that Fan Duel market leadership is related to the retention levels of customers who do support its easy functionality relative to peers.

Because of its immense scale above its nearest peers, we believe that FLUT will disproportionately benefit from any and all newly legalized states in the future. We like its global spread; we see it maintaining leadership in the US. We also see consolidation coming through either merger or acquisition in the sector. Fan Duel will be part of that as well.

Conclusion

The initial market reaction to FLUT being traded on the NYSE is over and the trading has settled into a pattern of slow but steady upside ahead. We turn to the sports calendar, which includes, THE FINAL FOUR (okay, but not great), The NBA playoffs, which will be strong, and the NHL playoffs, which always attract niche bettors. The baseball season has never been anywhere near the golden NFL, so we will be facing somewhat of a respectable period ahead. That means the stocks in the sector, regardless of strong results in the next sequential quarters, will remain relatively cheap.

Betting that FLUT will not only hold its current share price but sustain scale and build, we are putting a PT of $250 on the stock by Q3’24.