DraftKings Inc. (Ticker: DKNG) - Brief Breakdown

Brief Breakdown

Brief Breakdown: DraftKings Inc. (NASDAQ: DKNG)

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Company Description

DraftKings Inc. (NASDAQ Ticker: DKNG) is an American company specializing in daily fantasy sports contests, sports betting, and online casinos. DraftKings was founded in 2012 and initially offered competition betting in Major League Baseball. DKNG quickly expanded to daily fantasy across all sports. DKNG has received funding from the MLB, NHL, the Fox group (which later was acquired by The Walt Disney Company), the Kraft Group, and many more. In 2016, DraftKings and FanDuel, the two largest companies in the daily fantasy sports industry, agreed to merge. However the merger was blocked by the Federal Trade Commission in 2017 because the companies own a combined 90% of the market. In 2018, DraftKings opened its first legal mobile online sportsbook in New Jersey. DKNG now has online mobile sports betting operations in 6 states and daily fantasy in the majority of the United States. In 2020, DraftKings became a publicly traded company through a reverse merger with a special-purpose acquisition company (SPAC).

Quantitative Analysis

At the time of this writing (5/31/2021), DraftKings is trading at $49.95, with a 52 week range of $27.54 - $74.38 and a market cap of approximately $20B. In Q1 of 2021, DraftKings grew revenues by 175% compared Q1 2020 and issued $1.1 billion in convertible notes due 2028 with a 0% interest rate and a $135.50 conversion price. They lost $0.36 per share in Q1 of 2021, which is significantly less than the projected $1.42 per share. DraftKings also increased its 2021 revenue guidance to $1.1 billion at the halfway point of the year which would give DKNG a 79% year-over-year growth. This dramatic growth spurt is due, at least in part, to the growing popularity and spreading legalization of online sports gambling in the United States. 2021 Q1 performance is also likely due to the simultaneous activity of several professional and collegiate sports (due to COVID-19-related delays). Since going public through a SPAC, DKNG’s stock price has skyrocketed, at one point reaching 600% higher than its opening price of $10 per share. You can view a breakdown of DKNG’s earnings from Q1 2021 here and view their 2020 Investor Day Presentation here. You can see the price history of DKNG below.

Qualitative Analysis

Given the increased popularity and improving legal landscape for online gambling and sports betting, DraftKings has a bright future. While daily fantasy sports gambling is legal in the majority of the United States, sportsbook-type gambling remains legally less firm across the United States. Following November election results, several states voted to legalize sports betting and other online gambling platforms. As legalization spreads, DKNG may be able to onramp existing customers to their sportsbook. As described in our breakdown of Penn, Cision projects the sports gambling industry to have a compound annual growth rate of 10.8%, which will provide DraftKings and others in the sports gambling space the ability to grow and acquire new customers where sports gambling was not previously accessible. Despite the lack of earnings described above, DKNG is one of the leaders in the rapidly growing online gambling industry.

Bullish Thesis 

Here are three points to support the bullish thesis:

• Daily fantasy sports baseline: As previously stated, there are two primary players in the daily fantasy sports industry: DraftKings and FanDuel. Although DraftKings has plenty of room to expand their online casino and sportsbook, they already have a solidified business in the daily fantasy sports (DFS) realm that has a stable and reliable customer base. DraftKings reported they are the highest and most preferred app for daily fantasy at 38% and have the most brand recognition at 67% compared to the second largest operator having 22% of DFS users preferring their platform and 53% brand recognition. As sports gambling becomes more widespread, more customers may get into DFS - having a recognizable and reputable brand name will do nothing but help DKNG grow and have room to explore other avenues of gambling while maintaining/growing DFS revenue.

• Q1 2021 Performance: DraftKings had a great Q1 to start 2021. Analysts were expecting DKNG to report revenue of $231.5, yet DKNG shot well past that mark and reported a revenue of $312 million. This mark beat the analysts estimates by 34.7% and gave DKNG a 175% growth year over year. This strong performance shows the increase of online betting as well as the continued growth to the sports gambling space which was highlighted in our breakdown of Penn National Gaming. Q1 has also brought confidence to DraftKings as they have started guiding investors to look for revenue in the range of $1.1 billion, which is 16% higher than the previous mark of $950 million by midpoint of this year. This is encouraging and gives a bright outlook for the rest of 2021.

• Brand recognition: As mentioned above, DraftKings is one of the most recognizable brands in the online gambling industry. According to DKNG’s Investor Day Presentation, DraftKings is the most recognizable brand across daily fantasy and sportsbooks related gambling and the preferred brand for daily fantasy, sportsbook, and online casino related gaming. Brand recognition will be a powerful asset going forward as the online gambling industry has been growing rapidly. Unlike many of the more traditional in-person gambling brands, such as MGM, DraftKings is becoming the preferred gambling website for younger generations of gamblers. Although this is great for DraftKings, the cost of each customer is $371, but DKNG also reported each customer is worth $2500. Hopefully DKNG can lower the cost per customer acquisition and maintain the longevity of each gambler.

Bearish Thesis

Here are three points to support the bearish thesis:

• High marketing budget: As a relatively young company, DraftKings must spend money to develop not only it’s platform, but also its brand name. Indeed, their sales and marketing spending quadrupled in Q1 of 2021 versus 2020. This level of spending played a large role in the losses posted for the Quarter. This portion of the budget is likely to remain unchanged for the foreseeable future (at least through the end of 2021), as CFO Jason Park recently stated: “the net effect is that we continue to expect to spend significantly more on sales and marketing in 2021 compared to 2020.” High marketing expenses are particularly damaging in the online gambling industry, where, as is discussed below, competitors like Penn National Gaming have wide access to incredibly cheap advertising through Barstool Sports. Although their consumer base is growing, and revenue per customer is rising, high marketing costs relative to competitors should give investors pause. 

• Sportsbook market competition: DraftKings is focused heavily on rolling out and promoting its mobile sportsbook as more and more states vote to legalize online sports betting. Although DraftKings is a relatively well-established brand name in the mobile gambling industry, it faces stiff competition from companies like FanDuel, MGM, William Hill, and Penn National Gaming. Each of these companies are battling for a share of the sportsbook market. Of particular concern is the Barstool Sportsbook, powered by Penn National Gaming, which we covered in our last newsletter. While DraftKings has quadrupled its marketing budget, Penn strategically partnered with Barstool Sports and launched the Barstool Sportsbook. Barstool Sports is a giant in digital media and has access to a massive audience via social media, podcasts, and live streams. This access allows Barstool to promote their sportsbook at extremely low costs. Despite their high 2021 Q1 user growth and commitment to increasing their brand name, investors should use caution when considering where DraftKings stands relative to its competitors. 

• Uncertainty in widespread legalization: Sports betting and online gambling are gaining legal momentum in the United States, which is a reason to be bullish on DraftKings and other online betting platforms. However, the momentum is not guaranteed to continue and legislation often moves slowly. Sports betting in-person is currently only legal in 28 states, with legislation filed in an additional 10 states, and dead legislation/no filings in the remaining 12 states. Thus, there are currently 22 states where sports betting - even in-person - remains illegal. Of the 28 states with legal sports betting, few of them have approved DraftKings as an option for online/mobile betting. Indeed, DraftKings is currently live and legal in only 11 states. While the future of online/mobile sports betting seems bright in the U.S., investors need to understand that legal battles outside of the company’s control can have a large influence on how quickly their customer base grows. 

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Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.