It's great to see a return of postseason college basketball. Still, it feels a little different this year: Gone are the gratuitous camera shots of exhilarated (or disappointed) fans along with office pool watercooler banter as COVID-19 continues to limit social gatherings and large crowds.
However, you can still get your wagering fix. Thanks to a 2018 U.S. Supreme Court decision that overturned the federal ban on sports betting, online wagering is exploding. According to the American Gaming Association, 17.8 million Americans plan to place an online bet FOR this tournament, up significantly from 5.8 million in 2019.
Investors have taken notice: shares of mobile betting stock DraftKings (DKNG 0.67%) are up more than 200% since announcing its reverse merger with blank check special purpose acquisition company (SPAC) Diamond Eagle. This has investors asking when FanDuel is planning to IPO. Recent reports say this is being considered, but here's how you can own FanDuel stock today.
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How to own FanDuel before its IPO
Currently, FanDuel is a subsidiary of Flutter Entertainment Plc (PDYP.Y), a U.K.-based holding company that owns stakes in a host of mobile gaming and sports betting brands including Sky Betting, PokerStars, and Fox Bet.
Flutter Entertainment initially took a majority ownership stake in FanDuel a week after the Supreme Court decision and wisely structured the deal with an option to a commanding interest in FanDuel within five years.
The idea was to leverage the existing relationship and name recognition FanDuel had developed with its daily fantasy app to reach new online bettors. The strategy paid off handsomely, as FanDuel has become the No. 1 mobile betting site in the United States.
In December 2020, Flutter Entertainment made a deal to boost its stake in FanDuel ahead of schedule, acquiring Fastball Holdings 37.2% minority interest for approximately $4.2 billion. Currently Flutter has a 95% stake in the U.S betting giant, with Boyd Gaming having the remaining stake.
FanDuel appears cheap...now
Currently, it appears that FanDuel -- via Flutter Entertainment -- is being valued at a discount to DraftKings. At the time of the recent acquisition, Flutter announced that the deal valued FanDuel at an enterprise value of approximately $11 billion, compared to DraftKings' enterprise valuation of $18 billion. Because of stock appreciation since that date, currently DraftKings trades at an enterprise value of $22.3 billion, or approximately 36 times revenue.
Since FanDuel is a subsidiary, Flutter Entertainment does not have to list FanDuel's income or capital structure separately and only reports total U.S. revenue via sports and gaming. Additionally, Flutter's annual reports would not include full contribution from FanDuel's revenue on account of the December transaction discussed above.
However, FanDuel's CEO Matt King said that the company expects to generate $850 million in revenue in 2020, which represents approximately 14% Flutter's total revenue. For a quick comparison, Flutter Entertainment has an enterprise value of $43.5 billion. If FanDuel can command the same sales multiple as DraftKings, it alone would trade at an enterprise value of $30.6 billion -- or nearly 70% of Flutter's total EV -- despite being a minor contributor to its total revenue.
For Flutter to spin off a percentage of those shares for an IPO makes sense to unlock value, as investors are willing to pay up for a leader in an industry with potentially decades of growth as more cash-strapped states legalize gambling to raise revenue.
The key for investors will be to understand the capital structure if/when Flutter chooses to spin off FanDuel stock, as enterprise value includes debt and subtracts cash from market capitalization. That said, FanDuel appears undervalued when compared to recent transactions and public disclosures.
