FanDuel Stock: Do Recent Moves Point to an IPO?
Flutter Entertainment appears to be making a little wager on the United States betting market, if recent reports are correct.
According to “people familiar with the matter,” the U.K-based owner of FanDuel is seriously considering spinning off FanDuel and placing the company on a U.S. exchange after seeing the tremendous success of competitor DraftKings, which has seen its valuation increase nearly 900% since its April 2019 SPAC deal.
As DraftKings has shown, the demand for online betting companies is only matched in fervor by the demand for their product. Does it make sense for investors to bet on FanDuel’s stock?
What is FanDuel?
Initially founded as a daily fantasy sports site, FanDuel wisely expanded into online sports betting to take advantage of the Supreme Court’s ruling that struck down the federal ban on online betting. Flutter Entertainment, then Paddy Power Betfair, acquired a majority stake of FanDuel in 2018 and currently owns 95% of the company.
Expected IPO Date:
- Increased Legalization: In the three years since the federal ban on gambling was overturned, 16 states have approved mobile betting. Look for that number to grow as cash-strapped states are looking for revenue from a variety of new sources.
- First-Mover Advantage: FanDuel was among one of the first entrants in the space as traditional casinos fought online betting for years.
- Top-Dog Status: FanDuel is the market leader and will benefit from network advantage.
- ESG-Hostile: FanDuel’s business model doesn’t adhere to ESG standards. This emphasis on ESG-friendly investing is on the rise with reports stating as much as one-third of all U.S. assets under professional management adhering to sustainable investing principles.
- Trust Deficit: FanDuel and DraftKings have been subject to a raft of class action lawsuits ranging from misleading advertising to allowing employees to use insider information to bet against customers on each other’s sites.
- Competition: FanDuel was able to quickly pair with states and win share while traditional casinos were attempting to convince states to not allow online sports betting. Most see the die is cast and are spending significant money in the online space.
Bull Case: Why Would You Want to Buy FanDuel Stock?
Investors know a great opportunity when they see it. Right now, the mobile betting market is on the cusp of at least a decade of growth. In 2018, SCOTUS ruled against the NCAA and struck down the Professional and Amateur Sports Protection Act, which allowed states to expand sports betting online. Since then, 16 states have approved online betting with estimates are that figure could double in the next two years.
Legal Sports Report claims the total amount wagered for all sports since this decision is $44.3 billion with most being done via online app growth. SCOTUS winner New Jersey saw its wagered amount increase 30% in 2020 over the prior year with 84% occurring via mobile apps.
Leading the way in online sports betting are FanDuel and DraftKings, which saw an opportunity to expand beyond their initial business of daily fantasy sports betting in the wake of SCOTUS’ decision. Sports betting was a natural extension for these companies on account of their mobile-first business models, and both companies had significant name recognition due to aggressive advertising campaigns as daily fantasy sports companies.
Additionally, FanDuel and DraftKings took advantage of a bad strategy on part of traditional casinos, which instead of investing in mobile app buildout rallied around Sheldon Adelson’s Coalition to Stop Internet Gambling to lobby lawmakers at the federal and state levels. When this approach failed they were left playing catch-up while states quickly moved to approve online betting.
FanDuel remains the clear leader in this space, reporting $967 million in revenue in 2020 versus $644 million for DraftKings. Being the top-dog has benefits, as it will continue to help it acquire customers via network effects and allow FanDuel to make a more forceful case to become the online sports book of choice for future states looking to legalize betting and need a reliable partner.
Bear Case: Why Would You Want to Avoid FanDuel Stock?
Trust is important in online sports betting, perhaps more so than any other industry because the product is entirely an agreement. Unfortunately, FanDuel hasn’t always done the best job of acting in an ethical manner.
Most notably, the company came under intense criticism for an insider trading scandal where it was alleged FanDuel and DraftKings employees would use real-time data on current lineups and ownership percentages to bet on each other’s websites and take advantage of normal players. Other concerns were a lack of disclosures around “free money deposits” that were not available for withdrawal.
Most of these issues center around FanDuel’s actions as a daily fantasy site but the stakes are higher as it ventures more into online betting. Unlike fantasy, gambling is significantly more regulated, and any issues related to trust or insider dealing will result in fines and penalties from the state, not civil lawsuits between two parties. Additionally, high-profile mistakes will drive gamblers to competing apps as switching costs are low.
Even if FanDuel’s operations are flawless there are many who won’t touch its stock. Increasingly, investors are thinking about more than the bottom line and ESG (environmental, social, and governance)-friendly investing is on the rise.
While there’s a gray zone on the definition of an ESG stock, it’s likely gambling stocks are a firm no-go. This is increasingly important because ESG investing is now 33% of total U.S. assets under professional management per the U.S. Sustainable Investment Foundation.
FanDuel and DraftKings are finally facing strong competition from traditional casinos. MGM has BetMGM and Penn National Gaming acquired Barstool Sports and added the Barstool Sportsbook late last year.
While significantly behind, brick-and-mortar casinos have an advantage of pairing in-person discounts and specials to app betting and could steal share.
To date, FanDuel has done a great job combating the threat of competition. FanDuel is currently available in over half the states where online betting is legal and has wisely paired with casinos that did not have a sportsbook to deepen its name recognition for those that prefer a hybrid-gambling option.
When Can I Buy FanDuel Stock?
Now, sort of. FanDuel is a subsidiary of Flutter Entertainment Plc, a U.K.-based mobile betting company. Shares are available on the over-the-counter markets with a market capitalization of $40.2 billion.
Flutter does not separately list FanDuel’s income, only reporting total U.S. revenue via sports and gaming, but reports are the company reported $937 million in revenue in 2020, which represents approximately 15% of the company’s total revenue.
Flutter is contemplating a FanDuel spinoff because it does appear the company is undervalued when compared to DraftKings. If FanDuel can command the same sales multiple as DraftKings, it would trade at nearly $34 billion, or nearly 85% of Flutter’s current market capitalization.
It makes logical sense to spin off FanDuel stock as soon as possible for Flutter Entertainment. Performing a spinoff to unlock value is a classic MBA/private equity action. Due to a change in government regulation, investors in the U.S. markets are hungry for a pure-play U.S. sports betting stock.
Bringing the market leader without the lower-growth European businesses should find a receptive audience in the United States, but the devil is in the details and investors should understand the capital structure and asset ownership before committing capital.
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