Description

Flutter (ticker: FLUT) – LONG

Current Price: $187

Price Target (2-year time horizon): $450 or +141% return

Mkt Cap $33b / Enterprise Value $39b

Thesis Summary

This is an ideal time to look at FLUT for several reasons:  1) Forced selling pressure ended on 5/30/24.  FLUT relocated its headquarters from London to NYC and as a result the stock was removed from several European based indices.  2) FLUT will be added to several US-based passive indices over this year and next leading to 43m shares in passive index buying.  3) The FanDuel business in the US turned profitable in 2023 and should dramatically improve margins over the next 2 years.  4)  This will lead to excess free cash on an under-levered balance sheet. 5) The stock has been flat for the past 4 years, despite an impressive growth track record and a valuation that is below peers.  I see 141% upside over the next two years and derive comfort from the precedent of several successful stocks after they redomiciled to the US.

Quick Description:  Flutter is a global leader in online sports betting.  Their marquee brand is FanDuel, which was acquired from private equity in July 2018 after the US Supreme Court overturned online gambling laws. They also own various iGaming assets like PokerStars and Junglee Games.  Flutter has leading positions in the UK, Australia, Italy, and the US.  The historical revenue breakdown below shows that this is a global company with strong positions in several key geographies—but they also have numerous opportunities to expand into new geographies and with new products.

In terms of product mix, the sportsbook is ~50% of revenue.  I included the table below, which is a little dated, to demonstrate that several different sports contribute to the results including soccer, horse racing, basketball and, of course, American football.

FanDuel CMD; FY2021 revenue.

Substantial Growth Opportunities

The US market is projected to grow from $9b to $40b over the next 6 years.

Furthermore, Texas, California and Florida have yet to legalize OSB.  In the chart below, blue states are the ones that have already legalized a form of sports betting.   Approximately 50% of the US population does not have access to online sports gambling…yet.

 The International opportunity is even larger.

Attractive Business Model

This is an asset-light and negative working capital business model.  In the US, margins are dramatically below the corporate average (5% v 16% in ’23). This is because FLUT was entering new states, which typically come with aggressive promotions and it takes time to ramp to maturity.  It is critical to get leading market share in order to have scale and be able to offer the most attractive odds/spreads to customers.   The cash flow dynamics are also attractive.  When a new customer opens an account, they deposit money via the app and it sits there until a bet is made.  If the bet is a winning bet, the larger balance sits on the Flutter balance sheet until the customer requests a cash return.  This creates a constant stream of positive working capital and cash flow.  Furthermore, high short term interest rates (~5%) are currently a tailwind to earnings and cashflow.

With respect to my earnings forecasts over the next 3 years, I am slightly above consensus.  I estimate $4.1b in ebitda in ’26 v $3.9b for the Street.  Most of the difference is that I expect US margins to approach the corporate average.  I also expect some lift in the international segment which is improving profitability specifically in India.

An important variable to watch is the cost of acquiring customers.  Note that the cost is trending down for both Flutter and their closest competitor DraftKings. This is happening while the customer count is growing.  This is favorable for the entire industry. 

However, there is a big difference in profitability per customer.  FLUT is significantly above DKNG.  Part of the reason is that FLUT is more geographically diversified, but the other reason is that FLUT is more efficient in its marketing spend.

If you need another reason to prefer FLUT over DKNG, look no further than stock-based comp.  DKNG issues tons of stock.  FLUT is more reasonable.

First Mover Advantage is Helpful

The two leading US sports betting companies have consistently maintained between 60-80% of the entire market, and most recently it is around the high end of that range.   Fortunately, for FLUT, they have a leading market share position in nearly every geography they have a presence in.

Note OSB = Online Sports Betting, GGR = Gross Gaming Revenue

Valuation

Current Price $187 (6/5/24)

Odds-Weighted Target Price $340 (2-year)

On my ’26 estimates.

Bull Case Scenario:   $450 target price (+141%).  Lever up to mid-point of targeted range of 2.0-2.5x by end of ‘26.  $9.2b excess free cash used to buy back 25% of current mkt cap (assuming $250 repurchase price).   Maintain 17x multiple on ’26 EBITDA $4.1b.  Note that this assumes no multiple expansion from today’s 17x ’24 EBITDA. 40% odds of this scenario.

Base Case Scenario: $312 target price (+67%).  This assumes modest multiple contraction (from 17x to 15x) and no free cash redeployment. 40% odds of this scenario. 

Bear Case Scenario: $178 target price (-5%).  This assume dramatic multiple contraction.

Attractively Valued vs. Comps 

It is helpful to look at FLUT in context of other leading companies in the US.  FLUT has 3 year ebitda and revenue growth rates comparable to other leading companies yet trades at a discount.

Sorted by 3Y EBITDA Growth Average

Sorted by 3Y Revenue Growth Average

FLUT Even Comps Nicely vs. Mag 7

On BBG estimates  

Flutter Relisting – Creates Tailwind of Passive Buyers

Due to Flutter's redomicile on May 31, we have seen outflows due to UK index deletions.  While this created negative flows recently, we should start to positive flows as soon as this month. The game changing news will be when Flutter is added to the S&P 500 likely in 2025. 

Positive Precedent for Companies Relisting in US.

Recent relistings FERG, LIN, CRH and CNHI have all traded well since "deletion day."

Expect US Investor Participation to Increase with the Relisting.

Despite being the leading online gambling operator in the US, FLUT stock is significantly under owned by US investors.

Shareholder Alignment

·         ValueAct initiated 500k share position in March.

·         Long-term oriented Capital Group is #1 shareholder and added most recently.

·         CEO Peter Jackson has $20m in options that vest over 4 years. 

·         Zero insider selling over the past year.

Risks to our view 

• Tax rates can change by state or by country.  Last month we saw the State of Illinois raise taxes for online sports betting.  We also saw MA strike down a change in tax rates.  This will likely be a recurring headline as different states vote on budgets/tax policy.  Logically, states will balance their desire for higher tax receipts versus setting rates at levels that discourage companies from investing and growing in their states.  While it is likely that some states will raise taxes over the next few years, it will not derail the positive secular thesis in online betting. This is still a nascent industry that has years, if not, decades of growth in front of it both inside the US and outside.

• Tougher regulations can affect future growth opportunities.  

• Health of the global/US consumer--this is a discretionary item.

• Increased competition (DKNG primary competitor) may reduce margins, but we can track marketing spend quarterly and current trends are improving.     

• M&A integration and execution risk.   

Catalyst

Catalysts:

1)      Index adds: S&P 500 Total Market and CRSP both expected in June '24.

2)      NJ maintains current sports betting tax rate – 7/1/24

3)      Analyst day 2H24

4)      New US States approve online sports betting.

5)      Earnings