Flutter (LSE: FLTR) shares have the FTSE 100‘s biggest winners in the last year and who saw that coming?
Actually, my Fool colleague Jon Smith did, predicting that Paddy Power and BetFair owner Flutter Entertainment would soar in 2023. That took foresight, because the stock had fallen 26% over the previous year.
Jon spotted the big reason for its likely success too, noting that the global sports betting, gaming, and entertainment provider has a massive opportunity in the US, which he called “a huge and potentially lucrative market for the firm”. I wish I’d taken heed, because Flutter has flown since then.
Good call, Jon
Recent Q1 results revealed a 92% jump in US gaming revenues to £908m, led by sportsbook revenues, which skyrocketed 147%. The US is where the action is, with revenues up just 8% once US figures are excluded.
In the UK, Ireland and Australia, Flutter is the incumbent trying to beat off challengers. However, this does give the £26bn group an admirable blend of existing market strength and future growth opportunities.
Flutter faces challenges, as every company does. Proposed gambling reforms could cost it up to £100m a year from 2024. A white paper has called for a 1% levy on all industry revenues, stricter affordability checks to cap losses, a £2 bet cap on online slot machines for the under-25s and curbs on ‘free’ spins.
There’s always risk
This has forced Flutter to take pre-emptive steps to clean up its image, introducing a £10 per spin limit, contributing 1% of its revenues to RET (Research, Education and Treatment), and committing to £20m a year of voluntary charitable contributions. It claims the changes already cost £150m in lost annual revenues.
Gambling reforms have been repeatedly postponed, amid heavy industry lobbying, and may turn out to be a low priority as the economy tanks while an election looms. It remains a risk though, but hardly a fatal one.
If I’d listed to Jon and invested £5,000 in Flutter shares 12 months ago, when they traded at around 8,000p, I’d hold 63 shares. At today’s price of 14,685p, my stake would be worth a handsome £9,178. I’d be sitting on a profit of £4,178.
It’s a shame I didn’t act, but it’s impossible to take advantage of every opportunity. I will console myself with my Rolls-Royce shares, which are the second best performer on the index over the last year, up 74.62%.
So much for recent history. The big question is whether I would buy Flutter today and I’m sorely tempted. Those US growth figures are nothing short of spectacular, especially given today’s downbeat economic outlook.
My big concern is that I am too late to the party, with the stock looking expensive at 76.83 times earnings. Another worry is that net debt is high at £4.19bn, although that is forecast to fall to £3.35bn in 2024. Revenues are expected to climb by another £1bn to £10.6bn by 2024, but any slip could hit the share price given today’s high valuation.
I won’t buy Flutter shares today. My focus now is buying undervalued FTSE 100 dividend shares ahead of the next stock market rally. Although in another 12 months, I might be kicking myself again.
