Flutter Entertainment PLC's (LSE:FLTR, NYSE:FLUT) shares took a battering after the bookmaker reset its profit guidance for next year, catching investors off guard with a roughly 10% downgrade at the earnings level. But JP Morgan reckons the market has overreacted.
The bulk of the surprise came from Flutter's plans to launch prediction markets, a nascent corner of the gambling world where punters bet on everything from election outcomes to economic data.
The company is targeting a $200-300 million investment next year to dominate this space through a joint venture with CME Group, the derivatives exchange operator.
To JPM, Flutter's willingness to spend big signals ambition rather than alarm. The US bank maintains its overweight rating and unchanged price target, arguing that the sell-off has been excessive.
Still, it's easy to see why investors are jittery. Flutter has provided limited detail on the economics of its CME tie-up, making it tricky to model the returns.
Prediction markets remain unproven territory, so it's unclear what payback Flutter will generate on these hefty investments. And headline risk is likely to linger, even though management insists it consulted all relevant regulators before launching.
The company operates FanDuel, the leading online sportsbook in the US, alongside brands like Paddy Power and Betfair in Europe and Australia. Its third-quarter results, released recently, showed the underlying business remains robust despite the guidance reset.
JPM expects Flutter to shed more light on FanDuel Predict, the name for its prediction markets offering, when it reports full-year results.
That announcement will come three to four months after the product launches, giving the company time to gather early data on customer uptake and engagement.
For now, the broker is urging investors to look past the near-term noise. Flutter's core business continues to generate strong cash flow, and its dominant position in the fast-growing US market remains intact.
The prediction markets gamble may be bold, but for a company built on calculated risk-taking, it's hardly out of character.