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2 Stocks For Betting On The Growth Of Fantasy Sports In Both The UK And U.S.

Published 04/09/2020, 10:08
Updated 02/09/2020, 07:05

On Sept. 2, shares of US traded sports-betting company DraftKings (NASDAQ:DKNG) soared when it was announced that basketball legend Michael Jordan would become an investor and special adviser.

In the US, DraftKings and FanDuel, which is part of the UK-based Flutter Entertainment (LON:FLTRF), are the two main platforms for sports and fantasy sports betting. Below, we'll look at the growth in the sector as well as the shares of these two firms to see if they deserve to be on investors' radar.

What Is Fantasy Sports Betting?

Boston-based DraftKings was set up in 2012 as a fantasy sports platform, which allows participants to create their dream teams made up of real-life players and potentially win cash prizes, typically derived from entry fees.

Metrics from the Fantasy Sports & Gaming Association show that there are more than 60 million fantasy sports players in the US and Canada.

In the US alone, the fantasy sports market is expected to grow by $9.34 billion at a compound annual growth rate of 10%. Similary, the US sports betting market is expected to hit $5.7 billion by 2024. This growth comes in the wake of US Supreme Court ruling that struck down the federal law that had previously limited betting on sports to a handful of states. Now, all states can establish their own regulations for sports betting.

DraftKings Went Public Via A SPAC

DraftKings went public in late April via a special-purpose acquisition company, known as a SPAC, instead of a conventional IPO. It merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded, and SBTech.

Up to 20% of the volume in the IPO market currently comes from SPACs. In recent months, Virgin Galactic (NYSE:SPCE) and Nikola (NASDAQ:NKLA) have also gone public through a SPAC transaction.

For a young company like DraftKings to merge with a SPAC allows it to avoid many of the hurdles involved in going public or selling new shares.

Diamond Eagle was listed in 2019 at $10 a share, which is a typical initial-listing price for SPAC companies.

In a matter of months, the shares moved as high as $18.69.

What To Expect From DraftKings and Flutter Entertainment Now?

The Street initially debated DraftKings' timing of going public amid the global pandemic. After all, there were no live sports to bet on in April.

To keep customers engaged, however, the company created new product offerings that included eNASCAR, Counter Strike and Rocket League. It also launched a series of pop culture free-to-play pool contests covering topics from political debates to competitive reality TV shows.

DraftKings Chart.

Since going public, DKNG stock has been volatile. It was officially listed on April 24, opening at $20.49. On June 2, it hit an all-time high of $44.79. It closed Thursday at $38.27. As a result of the rapid increase in share price, the P/B ratio of DKNG stands at 11.48, a high number.

Flutter Entertainment is one of the largest gambling companies in the world by revenue. The business has grown both organically and through acquisitions. So far in 2020, FLTR stock, which is listed in the FTSE 100, has also been choppy.

Flutter Entertainment Chart.

Following the rapid declines in March, the shares have had a remarkable recovery. Now, they are up about 32% on the year. Recent results from the company showed that poker and gaming segments thrived despite a drop in its sporting revenues. Its forward P/E and P/B ratios currently stand at 24.31 and 1.55.

Safety protocols are currently being drawn up stateside so that major league sports can return. However, question marks still remain. For example, a number of Major League Baseball games have already been postponed as players tested positive for COVID-19. Therefore, both DraftKings and FanDuel may face headwinds if customers cannot make bets.

The Bottom Line

Investors who want to capitalize on the potential of sports betting as well as the growth in fantasy sports in the US may want to consider doing further due diligence on both companies.

We believe, however, both stocks are expensive now as their current prices have potentially factored a full schedule of games. But a potential increase in the number of COVID-19 cases could easily mean all bets are off. This could trigger a decline of around 10%-15% in the price of each stock.

If we had to choose between the two companies, we'd prefer Flutter since its operations are not limited to the US. It is also an established company operating globally.

On a final note, growth companies like DraftKings tend to burn through cash extremely quickly. In case the company does not generate enough revenues, it may easily run into a financial headache. However, it may also find itself an acquisition target, which would benefit the current shareholders.

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