DraftKings: Riding The Sports Betting Wave

seekingalpha11-22 22:34

DraftKings shows strong Q3 earnings with 39% YoY revenue growth, despite regulatory and tax headwinds impacting the sports betting industry.The investment thesis hinges on DKNG's aggressive marketing,...

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This, of course, means that revenue is growing much quicker than the number of customers, showing that each customer is spending larger amounts. Therefore, although marketing costs for DKNG are very high at around 31% of revenue, the lifetime value of each consumer appears to be strong, so I'm okay with DKNG spending aggressively on marketing and other promotional tools. It's important that DKNG wins over as many customers in all the new states that they can, as these new areas  are coming up regularly and there are millions of customers to be won against competition. It's also very positive that marketing is coming down as a % of revenue. Just 2 years ago this figure was closer to 50% so to see it at 30% seems like a nice sweet spot for the time being between profitability and aggressive expansion. This aggressive marketing has seemed to work as well, as it appears that a duopoly is being created with FanDuel (D","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1861558580.USD":"日兴方舟颠覆性创新基金B","BK4588":"碎股","LU1861559042.SGD":"日兴方舟颠覆性创新基金B SGD","BK4150":"赌场与赌博","DKNG":"DraftKings Inc.","BK4585":"ETF&股票定投概念","BK4565":"NFT概念"},"translate_title":"DraftKings：驾驭体育博彩浪潮","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DKNG":0.9},"content_text":"DraftKings shows strong Q3 earnings with 39% YoY revenue growth, despite regulatory and tax headwinds impacting the sports betting industry.The investment thesis hinges on DKNG's aggressive marketing, duopoly with FanDuel, and potential growth in new states and international markets.Risks include potential tax increases and regulatory changes that could impact profitability and market position.DKNG is a margin expansion story with a favorable valuation, suggesting potential for growth over the next 3–5 years.   Jonathan Knowles  Introduction DraftKings Inc. (NASDAQ:DKNG) is a stock I've followed for a long term and has a small position in, mainly as a long-term bet on the continued huge growth of sports betting as regulations ease up across the United States. The investment thesis obviously comes down to a lot more than just riding the sports betting wave, but overall, I think there are a lot of bullish catalysts if DKNG manages to weather the regulatory and tax headwinds. Q3 Earnings Q3 earnings were fairly strong. We did see revenue growth grow again from Q2, but YoY growth is now significantly below 2023. This is, of course, expected, as there's no way a company like DKNG could consistently grow revenues upwards of 60% YoY. Here's a brief rundown of Q3 results:  Revenue was $1.1 billion, which was 39% YoY growth. Online sports book revenue increased 25% whilst gaming revenue increased 39%. Adjusted EBITDA hit negative $59 million. CAC improved by 20%. Gross margin hit 40% which was a 300 bps improvement on the prior year.  Investment Thesis There's a massively growing popularity for sports betting today. Watching sports essentially goes hand in hand with betting on sports, and even makes the whole sports-watching experience even more entertaining. Ever since states started to open up the legality of sports betting, the number of customers on the DKNG platform has shot up from 1.7 million back in 2018 to ~9 million today, which is over a 30% CAGR…whilst revenue has grown at around 69% CAGR ($191m in 2018 and $4.6b LTM in 2024). This, of course, means that revenue is growing much quicker than the number of customers, showing that each customer is spending larger amounts. Therefore, although marketing costs for DKNG are very high at around 31% of revenue, the lifetime value of each consumer appears to be strong, so I'm okay with DKNG spending aggressively on marketing and other promotional tools. It's important that DKNG wins over as many customers in all the new states that they can, as these new areas (states) are coming up regularly and there are millions of customers to be won against competition. It's also very positive that marketing is coming down as a % of revenue. Just 2 years ago this figure was closer to 50% so to see it at 30% seems like a nice sweet spot for the time being between profitability and aggressive expansion. This aggressive marketing has seemed to work as well, as it appears that a duopoly is being created with FanDuel (DUEL). DKNG now has ~32% market share whilst FanDuel is still winning with a market share above 45%, but the next closest competitors are below 10% market share. Therefore, investing in a company which is still in its hyper growth stage whilst already holding somewhat of a duopoly means there are a lot of positives. Looking ahead for DKNG, I think there's a lot of room to grow EBITDA and EPS as they become a lot more operationally efficient. Analysts are currently estimating revenues to grow at 29% through to December 2025, but their estimates suggest a 231% increase for EBITDA. EBITDA trending in the right direction (Koyfin)This is exactly the reason I think there's a good amount of growth for DKNG over the next 3-5 years. I'll dive into the numbers a bit more in the valuation section below, but I'm sure you could hazard a good guess at what huge improvements in EPS and EBITDA will do to the stock price. Outside of margin expansion, there's still a ton of opportunities for DKNG to grow revenues. Here they are:   International growth opportunities: s: US is DKNG's biggest market and I don't think this will change. However, they also operate in Canada and are looking to expand to Puerto Rico. Both these offer some fantastic opportunities and will give DKNG management confidence that they can expand elsewhere too.  Jackpocket acquisition: DKNG acquired Jackpocket which is an online lottery company. Although I don't see this being highly material to revenues over the long term, I do fully understand why they made this acquisition. Jackpocket acquires customers at a considerably lower cost than DKNG currently does. If DKNG can leverage this and then cross-sell Jackpocket customers to higher revenue areas like sports gambling, then this will be highly beneficial for the company.  More states in the US: There are 10 jurisdictions in the US that have begun the process to legalize sports betting just this year.  Risks As I just spoke about, one of the main reasons I'm bullish on DKNG is because of the potential huge increase in EPS and EBITDA. That is at risk if states across the US continue to raise online sports betting taxes. DKNG will find it very hard to raise their prices to consumers, especially currently during a period of hyper growth. The trouble here is of course that this is so far out of control of DKNG. Their success is essentially in the hands of the state officials, who can easily raise taxes. Legislators can also easily take away licenses if they want to get rid of companies like DKNG or encourage competition, which will destroy the current duopoly. Whatever happens, a lot of this is out of DKNG's control, and that's a big risk of investing in a company in this industry. Valuation Here's a graph of DKNG's EV/Sales: EV/Sales (Koyfin)39% YoY revenue growth seems fairly good for an NTM EV/Sales of 3.7x on the face of it, but the market is clearly pricing in lots of difficulties with online sports betting taxes. I do believe that a lot of these headwinds have been priced into the stock because I don't think a company with a duopoly in a market that is growing 12% annually through to 2030 and growing revenues over 30% annually should be trading at 3.7x EV/Sales. For instance, I did a screener on StocksGuide and filtered for stocks with a market cap above $20B with more than 30% and with an NTM EV/Sales multiple of less than 4x. There were only 16 results in the US market that fit these criteria. Conclusion  I don't think Q3 was that strong of a quarter for DKNG, but it certainly wasn't a bad one. The stock is up 20% this month, which suggests investors were fairly happy with the results. I would say that there is no huge money to be made on DKNG, as I think it's a margin expansion story from here on rather than a hyper growth story. We see most of the money made in hyper growth stocks rather than margin expansion stories. However, I think from a multiple valuation basis, it's definitely possible to suggest that DKNG is trading at a nice valuation to ride the sports betting wave over the next 5 years.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485691982"}