Paddy Power Betfair’s expansion into the U.S. sports betting market has outweighed a poor third quarter earnings report and caused two investment banks to upgrade their investment recommendations for the company.
Morgan Stanley and UBS both upgraded their recommendations.
“Paddy Power Betfair’s US business is seen as a key play on the attractive US opportunity, and M&A upside risk is increasing, in our view,” Morgan Stanley said in its report.
UBS also pointed to the company’s U.S. ventures as a positive.’
“We believe Paddy Power is well positioned in the U.S. with FanDuel, which combined with the market size potential means we see potential positive catalysts where we to get more comfort around the UK performance.”
The reports come despite the betting company’s third quarter update, which showed its retail revenue fell by 4 percent to $106.8 million. Group-wide, EBITDA fell 16 percent to $131.5 million. Revenues however, rose 10 percent to $629 million.
The company did report strong growth in online businesses where revenues were up 15percent and sportsbook revenues were up 17 percent.
U.S. revenues, which now include FanDuel’s daily fantasy sports business were up by 22 percent. U.S. sports betting net revenue came in at $5 million for the quarter.
“In the U.S., the exciting potential of the sports betting opportunity and the strength of our strategic positioning has been evidenced by our experience to date in New Jersey,” said CEO Peter Jackson. FanDuel recorded a 30 percent share of the sports betting market in September, driven by a market-leading customer proposition, our strong brand presence and the ability to cross-sell from our fantasy sports player base.”
Jackson also said that the companies sports betting business in the U.S. has not cannibalized DFS revenues.
“To date, the customer acquisition trends that we’ve experienced in New Jersey have confirmed to us the value of our fantasy sports player base, both in terms of players who’ve been active with FanDuel recently, and perhaps more encouragingly, with respect to dormant customers reengaging with the brand,” he said.
However, startup costs in the U.S. did affect profit, Jackson said.
“For 2018, this investment means we expect to record an EBITDA loss of around £25 million relating to U.S. sports betting, with £4 million of this incurred in quarter 3,” he said in the report. “As you would expect, we’ll not be giving guidance on expected investment levels for 2019 at this point. Relevant factors that will determine the scale of investment include how the New Jersey market evolves and the timeline of additional markets legislating, regulating, and ultimately, going live.”
