- The two market leaders, DraftKings Inc. (DKNG) and Flutter Entertainment plc (FLUT), bypass tax surcharge and reduce promos. Mr. Market loved it, with up to 4% spikes on the respective trades.
- Buy both together equal weight as NFL looms.
- The combined share of market virtually assures an upside going into another betting year of 10.3% CAGR.
PREMISE: It is a rare set of circumstances when you can buy two unchallenged stocks owning 70% of market share of a sector at an attractive price. This, in our view, saving black swan events, is a sound in and out strategy. A CAGR growth consensus run over 10.3% gets the sector revenue estimate to $23.8b by 2029. Also bullish is that the average hold percentage of sports bets is running around 2% higher than long-term normal of 7%.
The combined US revenue of both companies in 2023 was $8b. ($4.4b FLUT and $3.6 DKNG). Next nearest in the sector was BetMGM (MGM) at $1.9b.
Above: some estimates of CAGR growth got 10.3%. We’ve taken a more conservative stance, looking for $23.8b by 2029. But BofA says higher.
We believe it is a fair assumption that the two companies will retain today’s dominant market share until then. Forward estimate: Seventy percent of the 2029E $23.8b brings over $16b in revenue for the combined leaders.
Our thesis: The combined upside of owning both leaders is a better bet as the NFL season is near opening. It beats a diverse sports betting portfolio based on the idea that if sector performance blazes, the tide will lift all boats. That remains true. But when you have a lion’s share to the degree that FLUT and DKNG have going into high season, you extrapolate a multiple of the total gains of market share, revenue and net income. All impacting stock valuation between now and the end of February. There is value in scale, buy or sell.
Let’s look at the pricing now
FLUT: $191 (March of this year $221)
DKNG: $31 (March of this year: $41).
Combined value last March: $262 Today: $231 ~10% down.
Now we are going into NFL peak season wagering.
NFL bettors produce 81% of all legal bets for openers.
Assumptions of the combo buy
Seasonality will restore the stock ~10% off last March.
CAGR will add 10% organically, as it has been.
That’s a 20% gain of the sector at least of which the combo will capture 70%.
Most other competitive platforms should be part of any sectoral tide rise, but the risk on factor will be part of the calculation. That factor is not present in the two leaders per se. In a reverse situation, say a recession that hits all consumer discretionary stocks, you have the two leaders as a safer haven of scale during a downdraft.
As a remedy to some state governments raising gaming taxes to 40% (Illinois) on winning bets, the platforms have already announced they will compensate for the tax hikes by reducing promotional dollars. This was greeted as good news. Since legalization in 2018, excessive promotional spend has been the principal culprit, as the platforms have been losing money. Those of us with histories inside the gambling business realize it is the most elegant solution given the psyche of gamblers.
When a bettor has a win, he, of course, wants it all. The promos of platforms have no presence in his or her mind once a win is confirmed. Promo deals are always most responsive in the launch phases of a new platform. But inside the industry, promos in the areas of free bets or bonus specials are non-cash offers. They hit net revenues by reductions in margins to the bottom line.
Gamblers with wins don’t care, those who lose consider bonuses which produce wins incidental.
News on both stocks spiked at 9.2%, DKNG: up 4.67%.
Given the high tides lifts all boats theory is proven in this sector as openers, here are the prime competitors:
CZR: Any seasonal upside move in the sector must consider the prospects of the brick and mortar casinos, which dwarf the book as contributors to group bottom line. So is the performance of #3. A 7% market share owner, Bet MGM. All other pure play stocks are priced in a range where the seasonal spike may add a few points. In total, the gains between the end of this month and post Super Bowl realistically might add far less in total than the two leaders.
How to view such a play
You have to think about a dual FLUT/DKNG buy as a single stock. When you examine both as businesses, you reach the undeniable conclusion that they look like one business. Similar presentations abound, in offers, graphics, odds, pitches to other seasonal sports abound. The only differences are that FLUT has a vast global business, which DKNG has not, and the relative share of each on a state by state basis. But not all US states are equal in revenue to each platform. The key here in this combo buy you have the best of both. In states where DKNG leads, FanDuel may lag and vice versa. So you have the max performance in all states. That could amount to an average of 3.5% up compared with owning either one.
Inside the business, there has been talk of an inevitable merger of the two. But clearly, Mr. DOJ is bound to pipe up with antitrust non-nos. Tangentially, DKNG has made multiple announcements of their intention to acquire either a UK-based site, or a brick and mortar casino.
My point here is this: The case for buying one of the two or the other stands on the exact assumptions: A hot growth sector in the making, a churn level under control, reduction in promo spend, a fairly stable, growing customer base, and of course, the intermediate legalization in new states not yet in the party.
The combo bet, a relatively low-risk entry now: $239.
This is at least $20 baked in per one of each, if not much more. That is now a number we inserted after examining the month by month probabilities of NFL wagering in the 5/6-month cycle of 2023 plus beginning this month to March 1st.
At the end of this cycle one has the options to either hang around for March Madness, sell one of the two taking profits, selling both and bookend the strategy.
Remember, with a mini-portfolio your total risk is virtually confined to black swan exposure, which is not the case for a more diverse portfolio that includes small, pure play stocks. This strategy allows you to be part of an outcome that rewards you if one of the two outperforms.
Both stocks have recently begun to recover, largely due to their rejection of the surtax news. That adds to the timeliness of the combo move now as the NFL season looms out of the starting gate.
Our PT for the combo buy is $275—there for the taking. As noted, black swans or sharp recession notwithstanding.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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