DraftKings stock was hovering around breakeven in late trading after the company reported weaker-than-expected quarterly results.
The online sportsbook reported a loss of 14 cents per share, below Wall Street's estimate for a 2-cent profit. The firm reported $1.44 billion in revenue, short of the $1.51 billion expected by Wall Street.
The company said it was maintaining its full-year outlook for revenue between $6.5 and $6.9 billion.
DraftKings generated $115 million of adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, "which would have been even better if not for the customer-friendly sport outcomes and our higher-than-expected customer acquisition," CEO Jason Robins wrote in a letter to shareholders.
In other words, DraftKings signed up new bettors in droves amid the recent FIFA World Cup and NBA Finals -- meanwhile, a greater-than-expected number of gamblers made winning bets, weighing on earnings.
Robins noted that the firm is seeing "no discernible impact from prediction markets on our Sportsbook revenue." But DraftKings' proprietary prediction market, which is now integrated into its sports betting app, is picking up steam.
More than half of the firm's prediction market customers -- more than 600,000 users so far this year -- have built combo bets, the prediction market equivalent of parlay bets. Those are high-margin products that string together multiple individual wagers for a large payout.
"Combos are already approaching 20% of Predictions Consumer Volume," Robins wrote. "This is only the beginning."
This is breaking news. Read a preview of DraftKings second-quarter earnings below and check back for more analysis soon.
It's been an amazing summer for sports betting, with the U.S. hosting a FIFA World Cup that saw fan favorites make it all the way through the bracket along with an exhilarating NBA Finals -- for those not in Texas, anyway.
Counterintuitively, all that betting was bad news for DraftKings, which reports second-quarter earnings after the bell on Thursday.
Analysts surveyed by FactSet are estimating earnings per share of just 2 cents on revenue of $1.51 billion. The company has told Wall Street to expect full-year sales between $6.5 and $6.9 billion.
After a period of meteoric growth in the U.S. sports betting market, year-over-year handle growth has plateaued this year. As Barron's reported in a June cover story, regulatory headwinds, betting fatigue, and the complex threats and opportunities posed by prediction markets have sparked selloffs in sports betting stocks. DraftKings shares have lost about half their value over the past year.
If the earnings of DraftKings' closest U.S. competitor, Flutter, are any sign of what's to come, investors could be in for a bumpy ride. Flutter missed earnings per share expectations, lowered full-year guidance, and saw its shares fall 12% when it reported on Wednesday. CEO Peter Jackson also resigned.
The market seemed to be pricing in a similar result for DraftKings. Its shares were down 8% Wednesday.
Flutter blamed its drop in year-over-year revenue in the U.S. on "an adverse swing in sports results, which offset the benefit of strong customer engagement in the NBA finals and the FIFA World Cup."
In other words, Americans bet big on basketball and soccer, but they bet on the winning teams. Sportsbook revenues are directly tied to customer losses; the inverse is also true. When bettors win, DraftKings and Flutter lose.
The question now is whether DraftKings can hold on to some of those new customers, says Jeffrey Stantial, a managing director of equity research in the gambling sector for Stifel.
"Everyone appreciates that the World Cup was this massive tailwind," he says, which drove up handle -- industry jargon for total dollars wagered -- in June and July. "But that tends to be a very one-time tailwind. Historically there's not great retention on those bettors."
Stantial is also watching the company's iCasino results -- and he's not hopeful. "There's a real chance they put up mid-single-digit growth in iCasino, which would be a huge disappointment for folks. I think that's going to be a big storyline, maybe not talked about as much because everyone wants to focus on prediction markets and the sports side of things. But [iCasino has been] sort of the growth engine for the core business, or has been for the last few quarters after handle rolled."
As in the previous quarter, DraftKings Predictions, the firm's proprietary prediction market, will take up much of the spotlight. CEO Jason Robins' letter to shareholders last quarter mentioned Predictions 20 times.
Prediction markets' event contracts closely mimic sports betting but are legal for those over 18 and available in all 50 states -- even in states that haven't legalized traditional sports betting. DraftKings has integrated Predictions into its so-called super app, which serves bettors either a prediction market or sportsbook depending on their location.
The prediction market is primarily a customer acquisition vehicle in states without legal sports betting, but getting it up and running has been a costly venture. Whether that bet has paid off remains to be seen.
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