Over the past five years, the Flutter Entertainment (LSE: FLTR) share price has increased by over 40%. However, it’s currently down 35% from the all-time high that was reached in March 2021.
I wonder whether it will achieve these levels again?
History
Flutter Entertainment was created in 2016 by the merger of Paddy Power and Betfair. Since then, it has grown through acquisition, buying gambling companies in Canada, Georgia and Italy. To diversify, it has also acquired a US fantasy sports operator, and an online bingo website and app.
This period of expansion has seen sales increase by £4.3bn in four years.
Although most of its £6bn revenue in 2021 was generated online, Flutter Entertainment still operates 600 shops on the high street.
Growing markets
According to Technavio, a market research company, the world’s gambling market will be worth $565bn by 2025, an increase of $220bn in five years. This excludes the online gaming market, which Acumen believes could be worth $132bn by 2030.
That’s all good news for the “world’s leading online sports betting and gaming operator“.
FIFA said that bookmakers took $155bn during the 2018 World Cup. This year’s tournament which, ironically, is to be held in Qatar (one of the few countries in the world where gambling is illegal), is expected to beat that figure.
Flutter Entertainment should therefore be one of the winners from this year’s competition.
Half-year results
Investors liked the half-year results that were released in August, with the share price soaring 14% on the day.
The company disclosed an 11% year on year growth in revenue, and an increase in its average monthly number of customers to 8.7m.
Interest rates
However, spending on gambling and gaming is discretionary.
A backdrop of rising interest rates, which adversely impacts on the disposable incomes of customers, is not good news for the company.
Flutter Entertainment is also exposed to rising borrowing costs, through its relatively high level of debt. Borrowings were £62m at the end of 2017 but, four years later, had increased to £3.8bn. This is to be expected, given that a large proportion of its acquisitions have been funded by debt.
The company currently has a gearing ratio of 4.1 times EBITDA (earnings before interest, tax, depreciation and amortisation). This compares to its medium-term target of one-to-two times. Achieving this milestone is important because, at this point, the company has committed to reviewing its dividend policy.
A dividend was last paid in October 2019.
When the company released its results during the first week of August, a downturn in spending by its customers hadn’t been seen. But since then, central banks around the world have been raising interest rates.
What have I concluded?
At the moment, I feel it’s too much of a gamble for me to invest in Flutter Entertainment.
Although the markets in which it operates are growing rapidly, I fear that the coming economic headwinds and rising interest rates will dent its revenues.
I also like to own shares in companies that pay a dividend.
I’m therefore going to keep the company on my watchlist and review the situation in the new year.
Who knows, perhaps by then England will have won the World Cup. But then again, I wouldn’t bet on that either.