Michael Burry Bets on Beaten-Down DraftKings, Flutter Despite Threat From Prediction Markets

'The Big Short's' Michael Burry just revealed in a Substack post he opened new positions in sports betting leaders DraftKings and Flutter Entertainment despite the stocks losing 35.8% and 60.9%, respectively, over the past year.

After Burry disclosed his full-sized long positions with a 40% weighting on DraftKings and 60% on Flutter, the stocks rose 1% and 2.7%, respectively, on Wednesday.

The investor's trades were founded on the belief that despite prediction markets like Polymarket and Kalshi gaining traction in the US and disrupting the sports betting industry, regulatory hurdles could suppress the prediction markets wave. One reason platforms like Kalshi are gaining global popularity is because they allow users to trade derivatives on real-world outcomes ranging from politics to pop culture.

Burry mentioned he opened his DraftKings position 'in the low $26s' and Flutter at around $107 per share.

'DraftKings is inflecting as an operating business and the value is in the transition I foresee in the near future,' Burry wrote. On DraftKings' rival Flutter, he said the company 'has been hurt by capital misallocation in the past but is a fundamentally very good operating business with terrific scale.'

Low Multiple is Not Necessarily a Value Stock

Burry also shared in his latest trade post how he values companies. His valuation process is way different from the 1940s version of value perfected by legendary investors like Benjamin Graham, who had mentored The Oracle of Omaha, Warren Buffett.

Burry said a low multiple does not necessarily mean there's value in a stock. He highlighted the 'IV15' proprietary valuation benchmark he used to value stock, which represents the price at which a stock is expected to deliver around 15% compounded annual returns over a 15-year period.

Burry uses this indicator to find 'fat pitches' or beaten-down stocks by performing multi-stage discounted cash flow analysis that adjusts for accounting anomalies and stock-based compensation.

'The cash flow analysis generally has three stages but adds a fourth stage for inflecting growth companies and also adjusts for other special cases, including serial acquirers,' Burry wrote.

The investor had also highlighted Adobe as a 'fat pitch' when it was trading at a discount relative to its AI-resilience and conservative owners' earnings. He even purchased stocks like Lululemon Athletica and PayPal at significantly cheap valuations. On Lululemon, Burry had said that the company has around $1.5 billion in cash and almost negligible financial debt, adding that this year's free cash flow dynamics was much better than last year.

In all, IV15 is not as simple price-to-earnings ratio but a buy price target. He added that the baseline intrinsic value of a stock often sits somewhere between IV8 and IV10.

'Below baseline intrinsic value is where share buybacks actually are accretive to intrinsic value per share. Buybacks above that level may pull shares in but dilute (and thus reduce) intrinsic value per share. This is the depressing nuance of all these tech companies buying back shares at high prices to offset part of stock-based compensation,' Burry had explained.

Burry had earlier accused US big tech of leveraging accounting tricks to ramp up stock valuations and make their balance sheets appear stronger than they actually are.

Disclaimer: Our digital media content is for informational purposes only and does not constitute investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks, and past performance does not guarantee future returns.