Stifel Initiates FanDuel Parent Flutter With Buy Rating


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Stifel initiated coverage Thursday of FanDuel’s parent company, Flutter, with a $320 target price and a buy rating.

Titled “No Need for Early Cash Out, This Favorite Is Just Getting Going,” Jeffrey Stantial made the argument that the valuation for Flutter at this point is still valuable with its resilient market share and upside to future targets.

“While FanDuel’s competitive advantages & drivers of market share success are myriad, chief among them, in our view, is first mover advantage on parlay product, and the resulting sticky share of high-margin, recreational bettors,” Stantial said in the note.

The initiation came out after the market closed Thursday, but the FanDuel parent rode the wave through late and early trading to see FLUT open up 1.4% to $261.10 Friday morning.

FanDuel fueling free cash flow growth

One of the biggest upsides for Flutter right now is its expected free cash flow growth, Stantial said.

Stantial’s forecasts currently expect free cash flow to grow at a compound annual growth rate of 56%, from around $1 billion in 2024 to around $2.5 billion in 2027.

That gives Flutter more dry powder for mergers and acquisitions, which it has proven successful with in the past.

“Evaluating the broader online gambling landscape, we believe FLUT is the most logical bidder as additional brands are shopped given global scale and proven track record of realizing revenue synergies via global technology/pricing, ability to export innovation & best practices, and federated operating model,” Stantial said.

Pricing efficiency ‘critical’ for in-game betting

The pricing power from FanDuel thanks to its high-margin same-game parlay business also helps its straight bets, Stantial said. FanDuel offers “near leading pricing for straight bets,” he noted, while still maintaining its hold rate that is multiple percentage points higher than the competition.

That will help with the next key growth area for US sportsbooks: live betting. While competitors have invested “aggressively” in live betting, FanDuel’s global scale is “unrivaled,” Stantial said.

“In-house pricing & trading is also critical for in-play wagering … given higher velocity of odds-impacting game developments,” he added.

iGaming market share ‘less defensible’

Flutter outlined plans to grow its online casino performance at its 2022 Investor Day, with the plan to be the top operator by market share in 2025.

FanDuel’s team has focused on improving its product, acquiring casino-first players, and adding exclusive content from top game developers.

Stantial said the brand will likely remain the top US online casino operator outside of considerable market consolidation. That said, external pressures could challenge that spot, including online casino players leaving to chase bonuses on other apps or a late move by an omnichannel operator with a large retail casino database.

S&P 500 catalyst incoming?

Flutter is closing in on the final requirement to be included in the S&P 500, which could boost the stock, Stantial said.

Flutter became ineligible for index inclusion in London once it shifted its primary listing to New York. The final box to tick in the US is net income profitability for the most recent quarter and the trailing 12 months.

Stantial’s model implies positive GAAP earnings for the fourth quarter, which means inclusion in the S&P 500 could come as soon as mid-March.

Stantial did note that any valuation changes for Fox’s 18.6% option could lead to non-cash charges that knock those earnings off track. Fox owns a call option to buy that 18.6% at a current valuation of $4.3 billion.

Risks facing FanDuel

There are risks to investing in the FanDuel parent company, just as there are with any investment.

One of those risks is an ongoing issue: regulatory changes and tax rate increases. Multiple states have raised their sports betting tax rate after the market launched, and Maryland is looking to do the same this year.

Stantial also said competition from unregulated operators in both the sports betting and iGaming spaces is “arguably underappreciated.” Being unregulated means adding new products quicker and the ability to extend credit.

Stantial said Flutter’s future expectations could also lower should currently illegal states not legalize sports betting. There is more space left in the online casino segment for growth, but the overhang of retail cannibalization concerns remains.

Photo by Shutterstock / T. Schneider