FanDuel’s Father or mother Is a Cheaper Play on U.S. Sports activities Betting, Morgan Stanley Says

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Michael Loccisano/Getty Images for FanDuel

FanDuel doesn’t get the same attention from U.S. investors as

DraftKings,

its chief rival in online sports gambling, because of its ownership by

Flutter Entertainment,

a U.K. company with lightly traded U.S. listed shares.

Flutter deserves a closer look, Morgan Stanley analysts wrote Monday in upgrading the stock, because it looks inexpensive relative to DraftKings (ticker DKNG).

U.S. shares of Flutter (PDYPY) were up just 2 cents on Monday, to $98.12, but are off around 6% this year. DraftKings, meanwhile, is up 27% in 2021, to $61.97, after a 3% drop Monday.

“Flutter shares have disconnected from their gambling comp set over the past weeks,” wrote the Morgan Stanley analysts led by Ed Young. The firm boosted its Flutter rating to Overweight from Equal Weight and set a price target of 17,400 pence on the U.K. shares (FLTR.U.K.) against a recent price of 14,110 pence. That implies upside of about 23%.

“We see FanDuel as a comparable business to Overweight-rated DraftKings (Daily Fantasy Sports brand and legacy database) with added benefit of broader cross-sell pathways (TVG horse racing and poker) and now holding optionality (Flutter has 95% ownership of FanDuel) to close a valuation gap to U.S.-listed peers,” the Morgan Stanley analysts wrote. TVG horse racing refers to online betting on horse races.

Flutter has a significant international online gambling business, including sports and ownership of PokerStars, the dominant website for online poker. Unlike DraftKings, Flutter is profitable thanks to its international business, trading for about 34 times Morgan Stanley’s 2021 earnings estimate.

FanDuel and DraftKings are the leaders in U.S. online sports gambling. In New Jersey, the largest venue in the country, FanDuel has the top share. Both companies leveraged their top positions in daily fantasy sports like pro football to leadership in online sports gambling.

The Morgan Stanley analysts recently increased their estimate for 2025 U.S. revenue for the industry in online sports gambling and “internet gaming” (casino games like blackjack and craps) to $15 billion, up from $12 billion.

The firm sees 12 states legalizing sports gambling in 2021 including Ohio, Missouri, and Connecticut. They also expect that New York will legalize online sports betting, making it the first among the largest four states in population (California, Texas, and Florida are the others) to do so.

Looking at its valuation relative to DraftKings, Morgan Stanley wrote that Flutter effectively trades at a 33% discount to its rival, assuming a reasonable valuation of its international business.

Morgan Stanley cited Flutter’s “well-positioned U.S. business, a scale global operation, a strong management team, and optionality to drive improvement to international growth.”

Write to Andrew Bary at [email protected]