A global research firm is bucking the market trend by tagging FanDuel and parent company Flutter as the best bet in the US sports betting sector.
That’s the view of global equity research firm Redburn, which last week published a 53-page report on the two operators. Redburn initiated DraftKings with a ‘neutral’ rating but made the FanDuel parent a ‘buy’ with a target price from £130 to £150.
DraftKings stock soared through its first two months, trading at $37 today after opening near $17 in April. Flutter rebounded from a March low of $30 to sit near $70 today.
“The work we have performed on DraftKings has led to the conclusion that Flutter’s US business is better positioned,” report author Alistair Johnson noted.
Why Redburn sees FanDuel in pole position
Johnson pointed to four key advantages for FanDuel, starting with marketing efficiency.
“FanDuel already achieves greater efficiency from its marketing spend, which we expect to increase further thanks to the development of Fox Bet,” Redburn said. Flutter of course owns both FanDuel and Fox Bet.
Specifically, Redburn said the integrated media model would help Flutter’s US business deliver lower acquisitions costs and thus “materially better” EBITDA margins than its main rival.
Deeper pockets for FanDuel
Secondly, Redburn warned Flutter enjoyed the advantage in spending power thanks to its global business.
“DraftKings has a finite cash pool while Flutter can invest the proceeds of its core businesses into the US, suggesting the latter will be able to outspend its rival and extend the disparity in market shares,” Johnson said.
DraftKings of course just raised some $620 million through its recent share placement. The combined Flutter group is expected to throw up more $1 billion in EBITDA this year, according to consensus estimates.
B2B questions on DraftKings stock
Additionally, Redburn raised concerns about DraftKings’ profit margin on the B2B side.
“We have concerns on SBTech as a standalone business,” the analysts said.
SBTech profits after tax fell to around $5 million in 2019 as the company focused on regulated markets.
“Efforts to improve its customer profile … have resulted in materially worse margins,” Redburn said. “We doubt whether our concerns are fully appreciated by the wider market.”
Don’t take platform migration for granted
Finally, Redburn highlighted the potential execution risk when DraftKings migrates from Kambi onto the SBTech platform.
“Despite DraftKings referring to itself as ‘the only vertically integrated sports betting company in the US’, the vertical integration has not actually happened yet,” Johnson wrote. “The integration brings with it material risks – there is a reason GVC took nearly two years to move the Ladbrokes Coral brands onto its own platform.”
Room for more than one winner?
It’s important to note Redburn isn’t down on DraftKings stock as a whole. It agrees the company could see $1 billion in annual EBITDA at maturity and is neutral on the stock.
Instead, the research firm simply sees more upside in Flutter for US sports betting. The report concluded:
“The excitement surrounding DraftKings since it effectively listed in January has pushed its share price to a significant premium to the European players. As a result, one of either Flutter’s core business or its US division is now very undervalued.”