Paddy Power Betfair downgraded

With revenues of £1,500.8 million in 2016, the company is among the most profitable betting companies worldwide. In Europe, the company offers both online and offline gambling and has expanded heavily into the Italian market in recent months. This, however, according to Investec, may not be enough when it comes to the stock market.

Regulations hinder increase in share price

According to the Financial Times, Investec, an international asset and banking specialist group, said that "consensus forecasts have yet to adjust to punter-friendly sport results and tougher regulation both in the UK and Australia."

It, however, isn't all doom and gloom for Paddy Power. The specialist company put a £69.70 target on Paddy Power and Paddy Power closed 2.7 per cent lower at £75.40.

Paddy Power may be down 11% from last year but the company remains 50% above its peers within the bookmaking sector. This is the message that Investec is telling its clients.

Paddy Power expected to expand further

While Paddy Power may not be as popular to investors as it ought to be, this is set to change as Paddy Power Betfair continues to expand. As a result of the merger, Paddy Power Betfair's buying power has increased. In recent months, the company has been working on expanding its US operations.

On 10 May 2017, the company purchased the US fantasy sports operator Draft for just under $50 million. This move had several advantages: first, Paddy Power positioned itself in the US market with an established brand. Second, Paddy Power is entering a market that is increasing at a rapid rate.

Innovation is at the heart of their strategy

Fantasy sports is innovative and is increasing in popularity. Furthermore, more and more US states have legalised fantasy sports leagues in recent years and more states are expected to follow suit.

Besides targeting a huge US market with this new and novel form of betting, Paddy Power will be able to offer its European customers a similar product, using the very same technology and possibly even platform.

According to Breon Corcoran, Paddy Power's CEO, the gambling scene in Europe is currently experiencing "pretty extreme" competition while fantasy sports has grown into a $300-million market - a market that provides operators with excellent competition opportunities across the US.

Despite tougher regulation within Europe, Corcoran looks into the future positively as he feels, its smaller gambling companies within Europe that are struggling the most. His advice to smaller gambling companies is to join forces with other smaller companies, else they will get eaten by the likes of Paddy Power Betfair.

In sum, Paddy Power's slight underperformance at London Stock Exchange is no cause for worry. In fact, after downgrading Paddy Power, Investec noted that in the long run Paddy Power is well-positioned given its exposure to online sports betting, listed market dominance in the UK and Australia, competitive advantages, operational gearing and a strong balance sheet.