It’s not every day FTSE 100 shares sink to 52-week lows. But, it can pay to take notice when they do. Although there are no guarantees the share prices of these companies won’t fall even lower, I make a habit of putting beaten-down FTSE 100 stocks on my value investment opportunity watchlist.
One company in this unfortunate position is online sports betting and gaming business Entain (LSE:ENT). The group owns the likes of Coral, Ladbrokes, and Sportingbet. After a mighty 42% fall in the Entain share price over 12 months, it’s trading near its lowest point since August 2020.
So, is this a rare chance to buy an undervalued stock today, or a value trap for investors to avoid? Here’s my take.
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Share price fall
There are several reasons for the poor performance of Entain shares, and many of these factors continue to present challenges for the firm today.
First, the group’s results show signs of weakness. In Q3, net gaming revenue slumped 5%, excluding the effect of a US joint venture. What’s more, Entain expects online core profit margins will fall to 25% in 2023, down from 27.1% last year.
Second, a regulatory crackdown on online betting in core markets like the UK is a growing threat to the business. Entain hopes further investment in other key countries, such as Brazil and New Zealand, can help to offset the slowdown in Britain.
Third, it’s been difficult for gambling firms to sustain the momentum they enjoyed in the pandemic online betting boom. However, FTSE 100 competitor Flutter Entertainment has risen to the challenge better. Its share price has advanced 10% in a year.
Perhaps unsurprisingly, activist US hedge fund shareholders are unhappy with the company’s stock market performance. Consequently, they’re putting pressure on its top brass. As other hedge funds increasingly take short positions against Entain shares, investors should prepare for the possibility of boardroom changes next year.
Rebuilding investor confidence
However, the outlook isn’t all gloomy. BetMGM, Entain’s US-based joint venture, continues to be a star performer. In Q3, net gaming revenue grew by 15% to $458m. As the third-most popular betting app in the online US market, Entain owns a crucial asset in a lucrative jurisdiction.
Moreover, it appears many of the risks facing the company have been priced in. Trading at a price-to-sales (P/S) ratio of just 1.03, the stock looks cheap compared to its five-year average.
Beyond its growth potential in the US, Entain can also point to evidence of underlying financial strength. Until the latest results, the group delivered 23 consecutive quarters of double-digit online revenue growth.
Provided the firm’s £70m cost savings programme is successful and it starts to reap the rewards of various recent acquisitions, the group could return to form next year. If so, investors who enter positions today might be handsomely rewarded.
A FTSE 100 stock to buy?
Nonetheless, regulatory risks and limited organic growth concern me. I don’t own any shares in this FTSE 100 company at present.
If I had spare cash to invest, I’d take a small position here to capitalise on the potential rewards. However, there are good reasons for investors to exercise caution until concrete evidence of improvement materialises.
