🎰 Is The DraftKings Share Drop An Overreaction?

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DraftKings: An Overreaction?

Shares of online sports betting operator DraftKings Inc. (DKNG) fell the most on record last Friday after the company reported slower-than-expected growth in paying users. Strong revenue growth and potential expansion plans are some positives. But with investor patience with profitability running thin, can DraftKings draft manage to overshadow the cons with its pros?

Betting Big

The sports betting industry is only growing in the US after the Supreme Court overturned a decades-old law in May 2018, paving the way for states to legalize the same. Currently, 30 states and D.C. have legalized sports betting, out of which 21 recognize betting online.

DraftKings has become one of the largest online sports betting and gambling platforms in the US. The company currently operates in 17 states in the US and also operates its online casino in five other states. Users on DraftKings can play and bet on games in leagues like the NBA, NFL, Major League Baseball or the Premier League of soccer.

Among competitors, DraftKings competes with FanDuel, a division of Irish bookmaker Flutter Entertainment, and others for market share.

Last year, the sports betting industry in the US generated $4.3B in revenue on $57.3B wagered. As of June 30 this year, over $3B in revenue has already been generated, and that number is likely to range between $6B to $10B by 2025.

DraftKings’ business shuttered in 2020 as the pandemic stalled sports activities. Despite the adversities, the company decided to go public through the SPAC route instead of the conventional IPO method. The company merged with gaming technology firm SBTech and Diamond Eagle Acquisition Corp., a blank-check company founded by former MGM Chairman Harry Sloan.

DraftKings launched the mobile sports betting app called the DraftKings Sportsbook in New Jersey in August 2018. Currently, the DraftKings Sportsbook operates in 18 states and covers 37% of the US population.

Pros Vs Cons

DraftKings defines a Monthly Unique Payer (MUP) as the number of unique payers per month who had a paid engagement with any of the company’s B2C products through its technology. The MUP is a key indicator of DraftKings’ user base and brand awareness.

For the quarter that ended in September, DraftKings’ MUP grew at the slowest pace in its history as a public company. The number of Monthly Unique Paying Customers increased to 1.6M during the quarter, growing 22% from last year. The figure also fell short of the 2M estimate from analysts. Growth in the previous two quarters stood at 30% and 29%, respectively. A decline in fantasy sports players further offsets the slowing growth.

CEO Jason Robins believes that expanding the online Sportsbook product will help drive customer acquisition, engagement, and retention going forward.

However, not all is bad with DraftKings. The company’s quarterly revenue comfortably beat estimates, losses were narrower than expected, and it also raised its full-year revenue guidance.

Key Highlights From Q3:

Revenue: $502M Vs $437M expected
Loss Per Share: $1 Vs $1.04 expected
Net Loss: $450M Vs Net Loss of $545M (YoY)
Average Revenue Per User: $100 Vs $47 (YoY)

For the full year, the company now expects to earn between $2.16B – $2.19B in revenue from $2.08 – $2.18B earlier. The revised guidance implies a year-on-year growth between 67-69%. It also expects its adjusted EBITDA loss to narrow to $800M from $835M earlier. DraftKings expects its revenue in 2023 to grow 33% compared to this year.

DraftKings is now looking at the states of Maryland, Ohio, Massachusetts, and Puerto Rico for further growth. These four regions have become the latest additions to authorize mobile sports betting. It aims to launch in Maryland this quarter, in Ohio and Massachusetts in Q1 2023, and in Puerto Rico in Q3 2023. DraftKings will cover 45% of the US population after this expansion.

Despite the positives, shares of the company had their biggest drop on record last Friday. Investors are concerned about the company’s profitability, which the management says will be achieved on an adjusted basis in Q4 of next year. Another worry is about states not legalizing online sports betting, leaving little headroom for the company to grow further. Despite spending ~$20M for a campaign in California, the referendum in the state is likely to go against the company and its peers.

The management also said there is a disconnect between their guidance and consensus estimates as the latter does not factor in their potential expansion plans. CEO Robins further said they are trying to balance managing growth and expenses to turn profitable next year.

Slowing user growth is definitely a cause of worry for DraftKings. Whether that warrants a drop as hard as last Friday’s is debatable. The company is confident of its prospects, but the regulatory overhang will always remain in an industry like the one where DraftKings operates. Whether investors want to bet on this is for them to decide. The token is in their court!

Market Reaction
DKNG ended at $11.80, up 4.33%.

Company Snapshot 📈

DKNG $11.80, +0.49 (+4.33%).

Analyst Ratings (31 Analysts) BUY 55% HOLD 42% SELL 03%

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Today’s Fun Fact

Most bettors make sports bets without doing any research

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