FTSE 350 Review: The gambling stocks with the smartest strategy

The pull of the high-growth US market is proving irresistible to gambling operators with the scale and means to make inroads across the Atlantic, with several London-listed companies building up operations as more states hit the green light on legalisation.  

At the front of the pack is Paddy Power and Betfair owner Flutter Entertainment (FLTR), whose FanDuel unit is the leading US sportsbook and number two i-gaming brand. The other major players in the market are DraftKings (US:DKNG) and betMGM, the latter a joint venture between Entain (ENT) and MGM Resorts International (US:MGM).

BetMGM is targeting around $500mn (£395mn) of cash profits in 2026 after moving into the black in the second half of last year. Gaming software and systems supplier Playtech (PTEC), meanwhile, is pursuing further state licences in the US and a gaming deal with Hard Rock Digital has raised its profile there.

Elsewhere, Walt Disney Company (US:DIS) is taking a punt on online sports betting through a licensing agreement between its subsidiary ESPN and Penn Entertainment (US:PENN). This year should provide evidence of whether it can compete with the leading operators as the battle for market share continues.

Flutter Entertainment made a secondary listing of its shares in New York on 29 January. Given the US now contributes almost 40 per cent of its top line, it would be no surprise if the board ultimately pushes for a sole US listing. That could feasibly happen this year.  

But the company’s latest update highlights that sector investors shouldn’t put all their cards on American growth prospects. While average monthly player numbers were up by a third in the fourth quarter, net revenue and cash profits were lower than previous guidance due to unfavourable sports results. And Flutter's valuation is a lot more expensive than London-listed rivals'. 

Away from the US, there is plenty for investors to keep an eye on in the Old World too, as rumours swirl of more M&A activity, and regulatory headwinds continue to threaten revenues.  

The signs are positive for an increase in dealmaking, with some operators looking increasingly ripe for a takeover. It emerged late last year that Playtech made a failed £700mn bid for William Hill owner 888 (888) in the summer, with DraftKings also sniffing around. Now a small-cap stock, 888 is described by Numis as a “sitting duck” for a takeover. This is no surprise given its lowly valuation and reliance on the domestic market.

Entain is also in a vulnerable position after the resignation of chief executive Jette Nygaard-Andersen, a £615mn fine from HMRC around historic bribery allegations and concerns about its takeover spree. Activist investors are putting the pressure on for a turnaround. A perennial question is whether MGM will submit another bid for Entain after its failed offer in 2021. While the former poured cold water on the idea last year, Jefferies still sees the strategic rationale behind a deal, and it's far from alone in doing so.

As Entain’s fine suggests, the regulatory landscape is hardening. Markets from Australia to Germany present a range of challenges on issues from tax to consumer harm-reduction policies.

In the UK, an election year could present more uncertainty for the sector in the aftermath of the release of the government's gambling white paper. While the impact of that policy framework wasn’t as bad as operators feared, worse could be to come. Either way, some companies aren’t finding the current domestic environment to be a fruitful one. 888 pointed to the impact of “safer gambling changes” in its latest update as UK and Ireland online revenues fell 8 per cent.

As with sin-stock peers, there is plenty to consider before hitting buy on a gambling company. Still, as well as risks, there will be plenty of opportunities ahead for investors as operators attempt to boost growth in a complex and evolving market.