Here’s why Flutter stock is floating higher

FanDuel just inked a deal with CME Group to enter the predictions market.

Flutter Entertainment (NASDAQ:FLUT) stock was up about 2% in early trading after the company announced a new partnership for its FanDuel property that will launch it into the growing predictions market.

FanDuel is the largest online sports betting site, with some 4.5 million active users. With this new deal with derivatives marketplace CME Group (NASDAQ:CME), FanDuel will develop new event-based contracts that allow users to predict the outcomes in financial markets.

Customers will be able to make predictions on a wide range of market questions with simple “yes” or “no” answers for as little as $1 per chance. It is essentially akin to betting on the outcome, but FanDuel and CME call it trading event-based contracts.

According to FanDuel, the prediction will focus on benchmarks such as the S&P 500 and Nasdaq 100, prices of oil and gas, gold, cryptocurrencies, and key economic indicators such as gross domestic product (GDP) and Consumer Price Index (CPI). An example of a question might be, Will the S&P 500 finish above X by X date? Or will the Fed lower interest rates at its next meeting?

“Individual investors are increasingly sophisticated and continually pursuing new financial opportunities,” Terry Duffy, CME group chairman and CEO, said. “To meet this demand, we have created this innovative partnership, which will operate a non-clearing FCM. Together, our event-based products will appeal to the growing public interest in markets, and we will provide education to attract a new generation of potential traders not active in derivatives today.”

Additional revenue stream for FanDuel and Flutter

Through this new initiative, a first for the online sports betting space, CME and FanDuel will form a new joint venture. In this joint venture, they will operate a non-clearing futures commission merchant (FCM) that will facilitate access to these event-based contracts through FanDuel.

“Partnering with CME Group will unlock our ability to bring even more new and engaging products to FanDuel’s fast-growing customer base,”Amy Howe, CEO of FanDuel Group, said. “We believe there is potentially a wide audience for trading event-based markets and we want to provide a platform that allows our customers to engage in this activity. We are excited to be partnering with CME Group to design new and engaging products, combining innovation with best-in-class regulatory compliance and consumer protections.”

Flutter offered no details on revenue projections for this new business. But as a first mover and the largest player in this space, the company should be able to gain a competitive advantage. Further, the business provides a new revenue stream beyond sports betting, further diversifying its income.

DraftKings to follow suit?

The deal is pending review and approval by the Commodity Futures Trading Commission (CFTC), which has closely scrutinized other prediction market providers. If approved. the event contracts will be listed on and subject to the rules of CME Group exchanges and available through all participating FCMs. The company anticipates launching it later this year.

Analysts at Jefferies expect FanDuel rival DraftKings (NASDAQ:DKNG) to follow suit, potentially through an acquisition, according to the Fly.com.

Flutter stock is up about 14% YTD and 40% over the past 12 months. It has a sky-high P/E ratio of 143 but a more reasonable forward P/E of 32. It has a median price target of $350 per share, which would suggest 19% upside.