A US inflection point is emerging for Flutter Entertainment PLC (LSE:FLTR) and Entain PLC (LSE:ENT), forming one of the key themes emerging from the bookmakers’ recent updates.
This, said broker Shore Capital, and global regulatory headwinds dissipating will “help shape the investment case” for both stocks over the next 12-18 months.
Through its ownership of FanDuel, Flutter “appears best positioned”, the broker said, attributing an implied valuation of around eight times earnings for the core operations and circa five times for the US business.
Both metrics are “at the lower end of our preferred valuation range”, said the broker, with a ‘hold’ stance on the shares unless they drop from the current £140 towards £130 in which case a more positive view would be taken.
Entain, via its BetMGM joint venture with MGM Resorts, which posted a first profitable quarter and is close to self-financing, “arguably provides the most attractive entry point into the US market”.
The current price “appears to ascribe little value to BetMGM and/or the longer-term growth prospects of the group,” analysts wrote, with US-listed peer DraftKings valued at a third to double the value of the US venture.
The US sports betting opportunity
From US$12.5 billion in 2022, the US sports betting and igaming market is on track to be a US$17 billion revenue market this year, based on the 50% growth in the American Gaming Association’s latest quarterly report, with 35 states having so far regulated some form of activity in the space.
Based on circa $100 revenue per head, Shore Capital said it sees embedded growth from existing states taking this to around US$25 billion and as more states continue to push through regulation, the eventual market opportunity is expected to canter past US$30 billion and head towards US$40 billion.
“Based on annual revenues of $30-40 billion and a potential margin of c.25-30%, industry EBITDA could reach $8-10 billion per year.”
Valuing this income stream at 10-12 times earnings, or three times net gaming revenue, would be a potential total market equity valuation of US$100 billion.
This, the broker noted, is around three times larger than the combined adjusted market values of the “Big 3”, FanDuel, Draftkings and BetMGM, with cash flow derived valuations implying a 5-7 times 2023 forecast net gaming revenue multiple range for the US.
Furthermore, analysts noted that the regulatory headwinds, most notably in the UK, that have depressed growth over the last 18 months “are beginning to dissipate”.
Over the medium term, Shore Cap sees a return to the historic structural revenue growth trend of circa 6-8%, with Flutter’s ex-US top line up 8% in the first half while Entain’s digital revenues were ahead by just 1% but rising to a mid-single-digit rate at the end of the period.