See below for this month’s Waterhouse VC newsletter. We specialise in global publicly listed and private businesses related to wagering and gaming.

Since inception in August 2019, Waterhouse VC has achieved a gross total return of 1,851% as at 31 October 2022, assuming the reinvestment of all distributions.

Crunch time in the US

As discussed in our June newsletter, investors in US online wagering operators have grown impatient with the losses recorded for the sake of gaining market share. One of the reasons why we focus primarily on suppliers to operators rather than on the operators themselves is because operators are highly dependent on their customer acquisition cost (CAC). In mature, highly taxed, regulated markets, a handful of operators earn the majority of profits because they have the lowest CAC and the best operational efficiencies.

*1 Year Performance of Operators with Exposure to US Online Wagering.*

Sportsbet take 2

Flutter’s third quarter results demonstrated FanDuel’s (Flutter’s US brand) clear market leadership, with 42% gross gaming revenue (GGR) market share in online sports betting and 18% market share in iGaming. As shown above, Flutter is the only operator out of their peer group that has generated a positive return for investors over the past 12 months and is our only portfolio holding in the group. We initially invested in Flutter because of their profitability in mature international markets, scale, marketing expertise and team.

In the US, FanDuel has achieved 19% more app downloads than DraftKings year to date (3.3m vs 2.8m) with 9% less marketing spend ($727m vs $803m). Product innovation and superior user experience have contributed to 77% year-on-year customer retention (Flutter Entertainment). These strong metrics allow Flutter to guide for US profitability in 2023.

FanDuel is consistently achieving 30%+ share of app downloads and has 46%+ market share of sportsbook GGR in its 3 largest states (New York, New Jersey, Pennsylvania).

*FanDuel’s App Download Market Share. Source: Taylor Collison.*

*FanDuel’s Year to Date Gross Gaming Revenue by State. Source: Flutter Entertainment Plc*

Flutter effectively leverages its experience gained outside the US to grow FanDuel with a focus on near-term profitability. In 2021, the US represented just 22.5% of Flutter’s overall revenue. As discussed in September, Sportsbet (Flutter’s Australian brand) has 50% online market share and has grown revenue at 36% per annum since 2009.

Scale is critical
In regulated markets like Australia, wagering taxes typically increase over time. Since 2009, Sportsbet’s cost of sales has grown at 42% per annum, increasing from 30% of revenue in 2009 to 49% of revenue in 2021.

Sportsbet’s increasing cost of sales as a proportion of revenue demonstrates the importance of achieving scale in regulated markets - a high CAC and large overheads will erode profits when gross margin is just 51%. Despite the increase in taxation in Australia, Sportsbet’s operating leverage and scale benefits have resulted in EBITDA margin expansion from 14% in 2009 to 34% in 2021. The profits of Sportsbet’s smaller competitors have been pressured by tax increases, contributing to Sportsbet’s market share gains. In Australia, the top 3 online sportsbook operators have 87% market share, whilst the top 3 in the UK have 78% market share and the top 3 in the US have 81% market share (Flutter Entertainment). All three jurisdictions have a cost of sales higher than 30% of revenue, negatively impacting the competitiveness, and ultimately the market share, of smaller operators.

With regard to taxation, the US is following a similar trajectory to Australia and mature European markets. FanDuel’s cost of sales has expanded from 31% in 2019 to 50% expected in 2022. New York launched in January with a 51% tax rate.

*FanDuel’s Cost of Sales as a % of NGR. Source: Flutter Entertainment Plc*

Don’t count FanDuel out of iGaming

In October, the total iGaming revenue in North America was a record $446m (+26% year on year and +10% month on month). iGaming is a significant growth opportunity for FanDuel. The company currently has 18% market share in iGaming, lagging third behind BetMGM and DraftKings, which have 29.8% and 22.8% market share respectively. Whilst FanDuel’s sportsbook is their primary customer acquisition channel, around 41% of sportsbook customers are cross-sold into iGaming within 30 days. FanDuel is committed to improving its range of iGaming product offerings and developing effective promotion tools to retain and monetise players.

*Total iGaming Revenue in North America. Source: Taylor Collison*

Taking a large slice of a large pie

There are many views on the potential revenue of US online sports betting at maturity. BetMGM and DraftKings estimate it to be $14.1 billion and $22 billion respectively (Legal Sports Report), whilst FanDuel estimates it to be $22.6 billion (Flutter Entertainment). At the moment, FanDuel has 42% market share and expects to generate around $2 billion of sportsbook revenue this year. If the potential revenue opportunity is $19.5 billion (taking the average of the three operators’ estimates) and FanDuel’s market share falls to 30%, FanDuel’s implied online sports betting revenue at maturity is $5.9 billion, which is around 3x higher than this year. If FanDuel’s market share remains at 42%, revenue would be around 4x higher.

As discussed above, Sportsbet has an EBITDA margin of 34%. Flutter aims for FanDuel to achieve long-term EBITDA margins comparable to their other divisions (including Sportsbet). If FanDuel achieves a mature EBITDA margin of 25%, the sportsbook business alone could generate higher EBITDA than Flutter’s entire business generated in 2021. This excludes any contribution from iGaming.

*FanDuel’s target long-term key operating metrics. Source: Flutter Entertainment Plc*

Waterhouse VC has been invested in Flutter since September 2019. Whilst our initial investment has appreciated 70% over the past 3 years, we remain particularly optimistic about the growth profile of the company’s US operations.

Media

I recently enjoyed speaking with Pierre Lindh from iGaming Next about 'Personal branding in business and what it means to be successful'. The discussion is available on Apple, Spotify and Youtube.

For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.

DISCLAIMER AND IMPORTANT NOTES

Please note the above information in relation to 888 Holdings, Bluebet Holdings Ltd, Pointsbet Holdings Ltd, Churchill Downs, Bally’s Corp, Flutter Entertainment Plc, Caesars Entertainment, Entain, Kindred Group, MGM Resorts, Penn National Gaming, Rush Street Interactive, Wynn Resorts and DraftKings Inc is based on publicly available information in relation to the company and should not be considered nor construed as financial product advice. Waterhouse VC has a position in Flutter Entertainment Plc. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.

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