Posted on: January 11, 2021, 09:54h.
Last updated on: January 11, 2021, 11:08h.
In the US online sports betting arena, Flutter Entertainment Plc’s (OTC:PDYPY) FanDuel unit and DraftKings (NASDAQ:DKNG) control approximately 63 percent of the market. But one fund manager prefers FanDuel over DraftKings.
Because of the daily fantasy sports (DFS) boom several years ago, DraftKings and FanDuel were able to leverage that footprint to become two of the dominant online sports wagering providers in the US. This followed the 2018 Supreme Court ruling on the Professional and Amateur Sports Protection Act (PAPSA). Among internet gaming entities, both enjoy superior brand recognition.
However, many investors, particularly on the retail side, display more enthusiasm for DraftKings. That’s because it’s a US-based, Nasdaq-listed company and a pure-play, standalone entity, whereas Flutter is an Irish company trading over-the-counter in the US. Ross Klein, founder and chief investment officer (CIO) of Changebridge Capital, lays out the case of why Flutter is the better bet of the pair.
“With the regulatory tides shifting in favor of more responsible gaming, Flutter is in a unique position to capitalize on a greenfield marketplace,” said Klein in an interview. “In the US, Flutter owns FanDuel, Pokerstars, FoxBet, and TVG Racing, providing them with a diverse portfolio of brands to penetrate this growing market.”
Flutter accounts for three percent of the Changebridge Capital Long/Short Equity ETF (NYSE:CBLS), an exchange-traded fund managed by Klein.
Don’t Sleep on Flutter Stock
Following a reverse merger with a special purpose acquisition company (SPAC), DraftKings went public last April, and its shares have more than tripled since then.
Based in large part on expectations that more states will approve iGaming and/or sports betting, retail investors and Wall Street analysts alike are fawning over DraftKings. In fact, some analysts believe the name can rally to $100, nearly double where it resides today.
However, as Klein points out, DraftKings and FanDuel compete in many of the same states, with the latter often grabbing larger market share.
“While diversification often comes with a premium valuation or a perception of limited upside, FanDuel is a pure and direct competitor to Draftkings,” said the Changebride CIO. “Per Flutter’s Q3 20 presentation, in Colorado, Indiana, Iowa, Illinois, New Jersey, and Pennsylvania (the states they were operating in at the time) FanDuel held a 43 percent market share, while DraftKings had 25 percent. This does not even take into consideration PokerStars or FoxBet.”
Flutter Can Unlock Hidden FanDuel Value
Late last year, Flutter upped its stake in FanDuel to 95 percent — Boyd Gaming owns the remainder — stoking speculation the Irish company could spin-off its US businesses to unlock shareholder value.
It’s expected Flutter’s US operations, including FanDuel, would command a valuation similar to DraftKings’, which is roughly $20 billion, meaning the international business is valued at $18 billion, according to Klein.
That “equates to 12.8x earnings before interest, taxes, depreciation and amortization (EBITDA), lower than the S&P500 multiple, with higher and more predictable margins and faster growth,” he said.
MGM Resorts International’s recent $11.06 billion for Entain Plc values that target at 14.3x EBITDA, indicating Flutter trades at a discount to that company.
“While this is higher than the implied multiple for Flutter’s International business, Entain argued that this valuation significantly undervalues the company, suggesting potential upside for Flutter,” adds Klein.