Flutter Entertainment isn’t a big, well-known brand. At least not yet. If you walked down a street in the United Kingdom and asked 100 people, there’s a good chance most wouldn’t know what a company worth £17.6 billion does. That a company called Flutter might have something to do with gambling is probably not a hard guess. But the details the average member of the general public might be able to add to that are likely to be scarce, despite FTSE 100 constituent Flutter being one of the UK’s 100 largest public companies.

The brands Flutter Entertainment owns are, however, much better known. The company used to be called Paddy Power Betfair. The amalgamation of two well-known bookies was created in 2015 through the merger of Ireland’s Paddy Power and the UK’s Betfair. It also owns several other online bookies (some still have a high street bricks-and-mortar presence too) online casinos, online poker, bingo and lottery brands that will be familiar to punters in the UK, Ireland and beyond including Sky betting and gaming and the PokerStars platform.

As a public company, however, Flutter has had a tough time of it over the past couple of years. Since a high point of £168.90 achieved in March 2021, its share price is down over 40%. The company’s great hope, a push into the USA market that recently liberalised online gambling regulations, including sports betting which was largely illegal across most of the world’s largest economy until 2018, has also proven a drag on its valuation.

Flutter, through its FanDuel brand, has made significant progress in acquiring a good chunk of the new U.S. market. Since the US Supreme Court overturned the federal law that banned state betting on sports in 2018, Flutter has claimed over half of the sports betting market, and a fifth of online casino gaming. In the past three years the US slice of group sales has jumped more than four times to 34%.

However, the significant investment made in acquiring that market share and deepening worries over the UK’s regulatory clampdown on bookies has hit Flutter’s valuation by steadily eroding Ebitda margins from high to low teens over the past few years.

But there are signs Flutter’s huge bet on the U.S. market will pay off. Interim results published in August showed its FanDuel US business in sports betting and online casinos has moved into the black at the ebitda level. That was a pleasant surprise for investors and well ahead of schedule after Flutter had said it had expected that breakthrough next year.

Despite recent gains as a result, Flutter’s share price is still not far off 2-year lows. Gambling and especially online gambling traditionally holds up well during economic downturns. That raises the question of if, given the progress being made in the hugely valuable U.S. sports betting and online casinos market, Flutter is currently significantly undervalued.

Flutter well positioned to dominate the huge and high growth U.S. online sports betting and casinos market

Well-run bookies have always been profitable businesses. Sports fans have been betting on the outcome of events since the Colosseum throbbed with life in ancient Rome and long before that. And it’s not just sport that we like to have a flutter on. Archaeologists have uncovered ancient dice and other artefacts presumed to be used in gambling games that date back as far as 3000 BCE Mesopotamia.

There is every suggestion gambling games are roughly as old as human civilisation. It seems to be an inbuilt urge. That innate urge to gamble has also been recognised over the years as not always easy to sensibly control. Irresponsible gambling has long been identified as a common cause of economic pain for individuals unable to limit themselves to a ‘fun’ budget.

Gambling addiction or even just a temporary loss of judgement in a moment of over-enthusiasm can hurt whole families. But gambling is also so deeply embedded in societies all over the world that few governments or rulers over the years have tried to ban it. When they have, it has simply gone underground.

In recognition of the reality people want to gamble and will find a way to do so regardless of government rules around the practice, the modern gambling industry is highly regulated. The hope is that a solid legal framework governing gambling both protects less responsible players from themselves and brings in significant tax revenues.

The UK and Ireland have traditionally had a relatively relaxed regulatory attitude to gambling and are now moving in the opposite direction to tighten protections in place to limit problem gambling. Over in the USA, it has historically been much stricter with casino licenses restricted to certain states and territories. People would specifically travel to locations where gambling was permitted like Las Vegas and Atlantic City in New Jersey to enjoy the thrill of casino games.

The rise of online casinos, online poker and online sports betting sites, however, made the sector increasingly difficult and expensive for U.S. authorities to control. Belatedly, it was recognised that trying to regulate the online gambling world according to the same geography-based rules as physical casinos was a losing battle.

In 2012, a New York federal judge rules poker was a game of skill rather than chance, exempting it from the 1961 Federal Wire Act and paving the way for Nevada, New Jersey and Delaware to launch licensed online gaming in 2013. Another ruling in 2018 allowed individual states to decide their own legislation for online sports betting and a steadily growing number allow it.

The market has grown rapidly. Last year about $57.2 billion was bet through commercial sportsbooks in the USA, generating revenue of $4.29 billion for operators. Based on the first half of this year, 2022 will set new records after revenues of $3.45 billion were generated over just the first seven months of the year. That represents growth of 62.7% on the same period a year earlier.

Flutter’s future growth prospects are tightly tied to success in the U.S.

Flutter’s decision to acquire a 58% stake in the U.S. fantasy sports company FanDuel for $158 million in 2018 has proven inspired. At the time, it wasn’t certain that legislation would change to allow for a fully-fledged sports betting industry in the USA. When the cards fell for Flutter just months later, the value of FanDuel soared.

The acquisition was a measured risk with Flutter confident that even the growing fantasy sports market would justify the price even if the anticipated sports betting market didn’t come about. Flutter took its FanDuel stake to 95% in 2020 by acquiring another 37% of the company but this time, with legal sports betting in the USA already a reality if still a nascent market, the price was a much heftier $4.2 billion (£3 billion). The leap in FanDuel’s value demonstrated just what a good move the original deal for the first 58% had proved.

Sports betting is now legal in 31 U.S. states and more are joining the party every year. In November, California will vote on the question and the largest state approving sports betting would be a significant boost to the market and companies vying for a share of the pie.

Flutter faces stiff competition in the form of DraftKings, another fantasy sports platform-turned-sports-bookie with an average of 1.5 million unique users a month. FanDuel, however, is in a stronger starting position with 2.2 million. The company will be difficult for competitors that also include BetMGM, a joint venture between Entain, another FTSE 100 gambling giant, and MGM Resorts, to catch.

Flutter’s experience in Europe has given it an edge in the USA

A big, wealthy, American casino operator like MGM has partnered up with Entain because of the latter’s experience in developing and monetising online products. It’s a hugely competitive environment and there is a recognition that European online gambling giants have the know-how homegrown U.S. firms need to compete.

Flutter has drawn on that in-house expertise and around 400 of FanDuel’s employees have worked elsewhere in the company previously. Others have moved from competitors in the UK and Europe. It is likely that Flutter will list at least some of the business in the USA sooner rather than later, with a FanDuel spin-off far from an outlandish guess at what form such a move might take.

Plans for a U.S. listing were paused last year when then FanDuel chief executive Matt King announced he was leaving the company. His successor Amy Howe has so far remained tight-lipped on the prospect and it might be presumed Flutter will wait for more conducive conditions than the current backdrop of equities markets represent.

Another bottleneck to a U.S. listing is an ongoing legal dispute with Fox Corporation, which has options to acquire stakes in FanDuel and Fox Bet, another U.S. sports betting platform owned by Flutter. The two sides can’t agree on a price for Fox to exercise its options and an arbitration process is expected to conclude later this month.

But whatever the price Fox has to pay, or decline to pay, to acquire the stakes, Flutter’s starting position in the USA is a very strong one. The company is paying through the nose to maintain its early lead with estimates suggesting over $1 billion spent on advertising.

But even so, as the U.S. sports betting market grows quickly, Flutter’s current valuation could look like the $158 million it paid for 58% of FanDuel a couple of years from now. Especially if what looks like an inevitable U.S. listing comes to pass.

The biggest risks are deep-pocketed competitors (but as mentioned FanDuel has a strong starting lead) or a change in the political climate and winding back of sports betting liberalisation. However, given the big potential upside, both risks look acceptable at the company’s current £17.64 billion valuation.