Macquarie initiated coverage of FanDuel parent Flutter with a $340 target and outperform rating.
In Tuesday’s note, Chad Beynon called Flutter a “rare large-cap stock” that meets the Rule of 40, “yet does not trade like one.” The Rule of 40 says a software company’s combined revenue growth rate and profit margin should meet or exceed 40%.
Beynon sees a clear path to compound annual growth rates of 12% for revenue and 21% for EBITDA through 2030, which could lead to a share price of around $600 by 2028, he said.
The initiation and a raise by Deutsche Bank did not move the needle much for the FanDuel owner. FLUT closed at $277.47 Tuesday, up 1% on about half its average daily volume.
Why invest in FanDuel parent?
Beynon broke Flutter’s investment thesis down to a couple of key parts. One is the potential to hit that $600 price in a few years based on growth from current and pending acquisitions.
He also pointed out Flutter’s “proven and replicable” acquisition strategy. The company has added more than $200 in share value for investors through its nine acquisitions in 2019, Beynon said, with the potential for that number to grow materially.
There is also room for more acquisitions, especially in high-growth markets like Latin America, he said. Flutter could also look at deals that would be more transformational, such as US retail gaming or lottery.
Flutter also has an “enviable” gross hold rate of 12.5% in the US while holding 35% of sports betting and online casino market share. This means the company can invest more at rates the competition cannot match while leaving the door open for “significant upside” should more states regulate either market, Beynon said.
Flutter target raised by Deutsche Bank
It would be premature to cash in on the growth from Flutter’s stock since it launched its US listing, according to Deutsche Bank.
Simon Davies raised his Flutter target to $301.70 in a Tuesday note. That is 25.4% higher than its previous target of $240.66. He maintained his buy rating on the publicly traded owner of FanDuel.
“Investors may be asking themselves whether the best [is] over, and if it is time to cash in some chips,” Davies said. “But we think Flutter seems well positioned, starting to exploit the strength of its well-invested Technology platform, its pricing and risk management … capabilities (enabling it to offer better value to customers), while consistently delivering higher gross win margins than its peer group.”
FanDuel boosted by parlays
Davies pointed out a couple of key stats that have helped FanDuel sit comfortably ahead of the competition in US sports betting.
For example, management puts its gross win margin around 12% in the US. That is nearly 4 percentage points higher than the rest of the market on average.
How it has such an advantage is quite clear: Flutter says it has a parlay penetration that is 14 percentage points higher than its US competitors. The gross margins on parlay bets are around 18 percentage points higher than a straight bet.
US listing for FanDuel parent paying off
Davies said the benefits of Flutter being listed in the United States have “only just begun.”
The company estimates US ownership of its stock is now around 60% from 45% prior to the New York listing. Those US investors provide between 75% and 80% of total liquidity with trading volumes up more than 2.5 times.
This growth is all without Flutter being listed on any major indices as well, Davies said. The company is on the S&P Total Market Index, which treats Flutter as a US company and is seen as a “step in the right direction,” he added.
International business solid
Flutter owners are getting much more than just a stake in FanDuel with their shares, with mature operations in the UK and Australia, as well as additional opportunities through mergers and new markets.
The international business is expected to grow EBITDA by an 8% compound annual growth rate between this year and 2027, and that is without including the recently acquired Brazilian operator NSX.
Add in the impact of Brazil and Flutter’s improving Italian business, and that compound annual growth rate through 2027 should be more than 20%, Deutsche Bank estimates.
