Flutter Entertainment Plc: Investor Discussion

Publicly traded companies mentioned herein: DraftKings Inc (DKNG), Entain PLC (ENT LN), Flutter Entertainment PLC (FLTR LN), Fox Corp (FOXA), Penn National Gaming Inc (PENN) 

Highlights

DeMatteo Research hosted a discussion on Flutter Entertainment (FLTR LN) with three bullish investors. With the gaming sector down 40-50% partially due to the broader tech and consumer sell-off, Flutter is poised for growth in the US market through its FanDuel platform. Investors in the stock shared thoughts and ideas about how the company can grow from here and expectations for execution. The following is a compilation of their thoughts and ideas from the discussion:

Investors agreed that Flutter Entertainment (FLTR LN) has strong management, great brands, and leading market positions globally. The opportunity for Flutter in the US market with FanDuel dominated much of the conversation and is viewed as the biggest opportunity. While the impact of future UK regulation was highlighted as a key overhang on the stock, the prospects elsewhere internationally appear strong.

Looking at valuation, investors agreed that free cash flow growth can justify strong multiples on the existing businesses over the long term before US growth is even considered. One investor added that he expects US EBITDA margins to expand from 20% to as high as 30% based on overall US market growth. With most stocks in the gaming sector down more than 40% from their 2021 highs, including Flutter, another investor viewed the stock as a potential double in 2-3 years. 

The investors indicated that the company continues to increase revenue and margin estimates in their models for FanDuel based in part on the stickiness of the US customer. That factor has been stronger than the investors had thought possible two years ago, with one noting that Flutter has beaten his old US numbers looking back a couple of years. Given this, he believes that FanDuel’s market share wins from DraftKings (DKNG) have been extraordinary over the past two years and expects FanDuel to be profitable next year. 

Flutter has been evaluating a potential spin off of some portion of FanDuel as a US listing, but those discussions have been tabled since mid-2021. A FanDuel spin-off and US listing could be a meaningful catalyst that will likely occur at some point after the company becomes profitable, the investors agreed.

One investor believes Fox Corp’s (FOXA) lawsuit against Flutter over the fair market value of Fox’s minority stake in FanDuel will be settled before it goes through arbitration this year. He views a settlement with Fox as a catalyst that will go beyond just the FMV dispute and will create an opportunity for FanDuel to monetize the FoxBet Super 6 free-to-play game, which has 6 million registered users. This should be an opportunity as he believes there is almost no overlap now between FanDuel’s 1.5-2 million active users and the Super 6’s 6 million registered users. Even if he haircuts the 6 million user opportunity by 50% and FanDuel can attract 10-15% of these bettors, that would meaningfully grow FanDuel’s user base.

In terms of Flutter's other brands, the participants are positive on Flutter’s PokerStars (The Stars Group) acquisition two years ago and believe strong international growth in that business will continue. PokerStars has had some stumbles in certain countries which investors chalked up as largely bad luck. A recent example is the Russia-Ukraine war, which has impacted engagement in that part of the world. The Russian market contributed £41 million to the group last year, with another £19 million coming from Ukraine. Also, in the Netherlands, regulators have put in motion a two-year “cooling off period” for gaming companies, asking them to re-apply for new licenses once new regulations are put in place. These actions resulted in Flutter’s temporary withdrawal from the Netherlands in 2019, but the company expects to resume operations in that country within the year.

Despite such setbacks, Flutter’s core international business represents a vigorous value “backstop” regardless of what happens in the US. The core international asset consists of a highly diversified collection of businesses across several countries run by strong management. These are virtually all the best-of-breed brands in their respective markets. All are free cash generating assets that will grow on a steady basis over time, with one investor estimating growth here in the MSD% - HSD% range going forward. 

Flutter has a strong cash flow position to continue acquisitions, but management is likely waiting for continued US market weakness to further erode valuations of smaller companies. As that occurs, the investors expect Flutter management to become more acquisitive. 

Speaking on state legalization, the investors are not bullish on the likelihood of legal sports betting in California. As such, they place more importance on the prospects for sports betting in Texas and Florida longer term. They view California as perhaps unlikely, but also highly accretive and a source of tremendous upside for the stock if FanDuel can pull out a regulatory win there.

Internationally, Flutter is awaiting the results of the UK Government’s review of the Gambling Act, with a White Paper due to be published in the second quarter of this year. That could result in potential further restrictions on gambling and gambling advertising in the UK. One investor broached the idea of shorting Entain (ENT LN) as a hedge against any downside risk as such regulations are likely to have greater negative impact on Entain. 

Another investor believes that shareholders already have a clear view of every regulatory rule being discussed in the UK, with none of the proposed rules representing black swan type risks. The so-called “affordability guardrails,” if such rules are applied to consumer gambling, may have a greater impact on other gaming companies in the UK since Flutter has been proactive in implementing such guardrails already. 

Investors agree that the stock gets unfairly tied to the fortunes of DraftKings (DKNG), a stock that none of the participants have a strong view on. One investor notes that valuing the US business at 3-4x revenue (in line with DKNG) implies a very compelling valuation for the ex-US business at 7-8x EBITDA. Alternatively, valuing the US business at zero implies a 12x EBITDA valuation on the ex-US business, which is roughly where Flutter traded before the US legalized sports betting in May 2018. Two investors agree that the promotional environment in the US could be weighing on the valuation. Too much promotional spend by FanDuel and every competitor across the sector could be costly in terms of near-term impact on EBITDA margins and is keeping some investors on the sidelines currently.

The investors weren’t keen on Penn Gaming (PENN) due to the company’s leverage despite their respect for Barstool founder David Portnoy. The company has done well to attract the next generation but that seems to be leveraged to Portnoy, potentially creating key person risk.