Online Gambling Investment Thesis: A Deep Dive into $FLUT, $DKNG, and $EVO

The online gambling sector is experiencing dynamic growth, driven by expanding legalisation in the U.S. and the increasing prevalence of mobile betting. However, regulatory headwinds and market saturation in some regions necessitate a discerning investment approach. This report analyses three key players: Flutter Entertainment (FLUT), DraftKings (DKNG), and Evolution AB (EVO), providing a comprehensive investment thesis for each.

Executive Summary

Flutter Entertainment, with its diversified portfolio and dominant U.S. presence through FanDuel, is poised for continued growth. DraftKings, while exhibiting strong top-line expansion, faces margin pressures and regulatory uncertainties. Evolution AB, focusing on the high-margin B2B live casino segment, offers a compelling investment case with its robust technological moat and global reach. We initiate coverage with a Buy rating on FLUT and EVO, and a Hold rating on DKNG.

Industry Overview

The global online gambling market is projected to reach \$127.3 billion by 2027, exhibiting a compound annual growth rate (CAGR) of 11.5% from 2023.¹ Growth is primarily fuelled by increasing smartphone penetration, the relaxation of gambling regulations in various jurisdictions, and the rising popularity of esports and in-play betting. However, the industry faces challenges, including stringent regulatory scrutiny, responsible gambling concerns, and the potential for market saturation in mature markets.

Company Analysis

Flutter Entertainment (FLUT)

Flutter benefits from a diversified global presence and a leading position in the burgeoning U.S. market through its subsidiary, FanDuel. FanDuel commands approximately 50% market share in key U.S. states.² This strong foothold, coupled with Flutter’s established brands in other markets, provides a robust platform for sustained growth.

DraftKings (DKNG)

DraftKings is a prominent player in the U.S. online sports betting and iGaming market. While the company has demonstrated impressive revenue growth, profitability remains a challenge due to high customer acquisition costs and intense competition. Furthermore, DraftKings’ reliance on the U.S. market exposes it to regulatory risks.

Evolution AB (EVO)

Evolution AB operates in the B2B segment, providing live casino solutions to online gambling operators. The company enjoys a dominant market share in live dealer games, estimated at around 70%.³ EVO’s unique business model, characterised by recurring SaaS-like fees, generates high margins and predictable cash flows.

Investment Thesis

Our investment thesis rests on the continued expansion of the online gambling market, particularly in the U.S., and the ability of well-positioned companies to capitalise on this growth. FLUT, with its diversified portfolio and U.S. leadership, offers a compelling investment opportunity. EVO, with its dominant position in the high-margin live casino segment, presents a strong case for long-term growth. While DKNG participates in a high-growth market, its current valuation reflects significant upside potential, thus warranting a more cautious approach.

Valuation and Forecasts

We employed a combination of discounted cash flow (DCF) analysis and comparable company analysis to arrive at our price targets. Key assumptions for our DCF models include revenue growth rates, EBITDA margins, and discount rates. Our base case scenario assumes a continued expansion of the U.S. online gambling market and sustained market share for FLUT and EVO. Sensitivity analysis was conducted to assess the impact of key variables on our valuation.

Risks

Key risks to our investment thesis include:

• Regulatory changes: Unfavourable regulatory developments, such as increased taxes or restrictions on online gambling, could negatively impact industry growth and profitability.
• Competition: The online gambling market is highly competitive, with new entrants and established players vying for market share. Intensified competition could pressure margins and hinder growth.
• Economic downturn: A macroeconomic slowdown could reduce consumer spending on discretionary activities like online gambling, affecting revenue growth.

Recommendation

We recommend a Buy rating for FLUT and EVO, based on their strong market positions, growth prospects, and attractive valuations. We recommend a Hold rating for DKNG, acknowledging its growth potential but noting the current valuation and regulatory risks.