Description

Flutter was posted up on VIC a couple years ago by Hasten in a well done and helpful write-up though a lot has changed since then in the industry and for the company. Today, Flutter remains an extremely compelling risk reward situation. Flutter is a diversified online gaming operator with high moat leadership positions in the United Kingdom (~24% of revenue), United States (~39%), Australia (13%) and within its International segment (~24%) which comprises Italy, Brazil, Spain, India and many other markets across the world. The company operates a number of well-known gambling brands, including FanDuel, Betfair, Sportsbet, Paddy Power, PokerStars, Tombola, Adjarabet and Sky Betting & Gaming.

Flutter has an impressive operational track record and mgmt has made smart decisions over time. Flutter is growing quickly and profitably in a global and diversified asset-light business that will yield substantial amounts of less risky FCF. Most importantly, EBITDA will more than double over the next two to three years as US EBITDA inflects materially higher and other markets continue to grow. The valuation fails to capture the potential earnings power and opportunity ahead.

Flutter is dominating in the US market, a sports betting and igaming market that some analysts estimate will grow by a 4x multiple over the next ten years. I think those estimates are conservative as the quest for new state revenue sources combined with consumer demand will only accelerate over the coming years. In the United States, most recently, FanDuel enjoyed a 47% sportsbook market share and a 23% iGaming market share. FanDuel’s market share will continue given their best-in-class and broadest level of products, technology, user experience, customer retention, lowest customer acquisition costs and its scale advantage. Draftkings is improving but still behind while BetMGM is in a flawed JV structure with MGM and had to acquire a company recently to make up for product and tech shortfalls. Other players such as Penn, recently unraveled their horrible deal with Barstool to do a questionable deal with ESPN. They are all losing the race to Flutter. The FanDuel analyst day (FanDuel Capital Markets Day 2022 (flutter.com)) from November of 2022 decently conveys Flutter’s advantage and why they are winning. The company estimates the TAM in the US at $40B by 2030. The US EBITDA long term margin goal of 25-30% by 2030 is in-line with Flutter’s non-US business and the industry. Flutter’s US margin today is only low to mid-single digits as they invest in the enormous opportunity. US EBITDA may fluctuate as new states launch but the pathway to those targeted margins is very realistic given the structure of the market, market share and the management team’s ability to execute. The US could easily achieve £2-£3B of EBITDA alone in the next four years vs a current 2023 consensus of only £145MM of US EBITDA and total Flutter EBITDA of £1.6B.

Outside the United States opportunity, there is a clear runway of growth and Flutter is positioned to capitalize. The market size outside the United States is expected to grow high single digits and become more regulated. The company estimates the TAM ex-US at $263B by 2030. Markets such as Brazil and India could be massive, and India alone could be another United States like growth opportunity over the next 5-10 years, which is clearly not being priced into the Flutter stock. Recently the CEO said the following when discussing India “we’ve been very pleased with the performance of our business since we acquired it. Junglee is one of the fastest-growing Rummy players since we acquired it and GGR is up 4x since we made the acquisition… so we’re still very excited about it” Even excluding India, the Non-US EBITDA will decently grow over the coming years as many markets are either slowly growing or quickly growing.  

There are also some additional catalysts on the horizon that should help the investment story. Flutter is pursuing a secondary US listing and will then seek a primary listing in the US. This should enhance the profile, help with recruitment and retention of employees, provide better access to new US investors and greater share liquidity. This should occur in Q4 with the primary listing in the US likely to quickly follow. Further, there should be ample capital deployment over the coming years and continued M&A as leverage goes below 2.0x next year. 

Several major overhangs on the stock have been resolved yet the upside is substantial. The Fox situation has been resolved and losses will go away, the UK regulatory overhang has been resolved and the US profitability question has been resolved. Currently, investors are growing concerned over the competitive landscape with news of the ESPN/Penn deal and Fanatics in the US and BetMGM in the UK combined with worries over Australia’s slowdown and general market sentiment impacting growth names. I consider these all valid concerns to diligence but would categorize them all as minor speed bumps in Flutter’s road to significantly higher EBITDA and FCF over the coming years.

Flutter’s engine is real and global and the stock is basically giving you the US opportunity for free, with optionality on M&A, capital deployment and home run opportunities such as India. Flutter is trading at 12.8x 2024 EBITDA with a major segment vastly under-earning its potential. Putting a reasonable value on ’24 US Revenue would imply a ~6.0x EBITDA multiple for the non-US business (in ’25 this drops to ~2.0x) in an industry where assets trade at low double digit multiples. I believe the stock is at least a double from current levels and see a path to mid 20s IRRs over the next handful of years.

Catalyst

US earnings progress

India progress 

M&A

Capital Deployment