Gambling giants Flutter Entertainment (FLTR) and Entain (ENT) have seen their shares fall between 15% and 20% over the last few months. However, Shore Capital analyst Greg Johnson flags declining regulatory headwinds and an inflection point in US profitability could lead to a step change in revenue growth and profitability for these companies from 2024 onwards.

The US sports betting market is dominated by three companies: fantasy sports betting groups FanDuel (majority owned by Flutter), Draftkings (DKNG:NASDAQ) and BetMGM (co-owned by Entain) which have a combined market share of around 80%.

The ‘big three’ delivered first half combined US revenues of around $4.8 billion and spent around $1.5 billion in marketing. This makes it difficult for smaller players to compete and build brand presence.

After many years of making losses with US operations, the three companies are close to finally turning a profit. FanDuel is guiding for 2023 EBITDA (earnings before interest, tax, depreciation, and amortisation) of between $120 million and $240 million.

Entain expects to be EBITDA positive in the second half of 2023 for its US operations while Draftkings significantly reduced its expected full year loss.

Johnson argues that as marketing ratios normalise and benefits of scale kick in, industry EBITDA (earnings before interest, tax, depreciation and amortisation) margins could reach 25%.

Based on projected annual industry revenues of between $30 to $40 billion, EBITDA could reach $8 to $10 billion. For context, gross gaming revenues are expected to reach $17 billion in 2023.

Johnson ascribes a 10 to 12 times EBITDA multiple which is comparable with US casino and gaming sector multiples over the last 20 years. This implies a total market equity valuation of $100 billion which compares with a combined market value of the big three of around $50 billion.

Adjusting for Flutter’s and Entain’s non-US facing markets Johnson estimates investors are currently ascribing just $30 billion to $40 billion to the US market opportunity. Johnson comments: ‘The market would be expected to be well regulated, concentrated, with high margins and strong cash conversion.’

One potential fly in the ointment is Walt Disney’s (DIS:NYSE) entry into sports betting through its ESPN sports platform. ESPN has partnered with regional casino group Penn Entertainment, but Johnson notes the company is currently a distant player with just 2% market share.

Entain is Johnson’s preferred play on the US market given that it trades on just nine times his 2024 forecast EBITDA. ‘The market appears to ascribe little value to (Entain’s) BetMGM and/or
the longer-term growth prospects of the group,’ he argues.

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