2023-09-18 06:19:58 ET
Summary
- Over 70 million Americans are estimated to wager on the NFL in 2023, with 15% planning to bet online.
- Sports betting is legalized in 38 states, driving a 44.2% increase in online gaming revenue.
- DraftKings has experienced significant growth, offering multi-bagger returns to shareholders and expanding into new markets.
- While there is no questioning the long-term potential, are investors overlooking potential future challenges?
In 2023, it is estimated that over 70 million Americans plan to wager on the NFL. Last year, data from the AGA states that a whopping 46 million Americans bet on the football. Surveys indicate that 15% of the US plan to place a bet online this year - yes, that is over 35 million people.
As favorable legislation continues to drive the sports betting market to new heights, BetMGM ( MGM ) CEO Seamus Magee expects this season to be the most bet-upon season in the history of the game.
As of September 7, 2023, sports betting is legalized in 38 different states and operational in all but three of them (Florida, Vermont, & Maine).
Data from the American Gaming Association depicts online gaming revenue surged 44.2% on a YoY basis, compared to a measly 0.9% increase in land-based gaming. The increase in online gaming was primarily driven by the introduction of online sports betting in Kansas, Maryland, Massachusetts, and Ohio.
DraftKings - The Story
Following its IPO in 2019, DraftKings ( DKNG ) has offered shareholders phenomenal returns, up 225% since inception. Moreover, the renowned sports betting company is up over 2.5x YTD, offering recent shareholders multi-bagger returns in less than a year.
What began as three ex-Vista Print employees sharing a passion for fantasy sports and creating DFS contests has evolved into a phenomenal growth story.
The Core Pillars
DraftKings business is comprised of 3 core segments that derive over 90% of the company's revenue.
1. Sportsbook - customers wager on sports, and DraftKings profits through setting odds that will provide it with the built-in margin of guaranteed winning, often referred to in the gambling world as "the vig" or "juice".
2. iGaming - this segment offers customers traditional land-based casino games including, but not limited to blackjack, roulette, baccarat, and slot machines.
3. DFS (Daily Fantasy Sports) - As DraftKings' first and flagship product, DFS facilitates peer-to-peer betting where contestants compete against each other in different fantasy sports contests.
The Moat - How Strong Is It?
DraftKings competitive advantage, or moat, lies in its fundamentally superior product and sticky business model. As a company still in the early innings of growth, DraftKings' 3-year period of its monthly unique players (MUP) and average revenue per monthly unique player has been nothing short of exceptional. As depicted in the chart below, DKNG has more than doubled both its MUP as well as its average revenue per MUP since 2020.
Author Created (Company Filings)
Continuing to remain at the forefront of innovative betting tools has led to its successful user acquisition and market penetration. DraftKings' ability to create stickiness in its business model is driven by its product innovation via same-game parlays, DFS improvements, the creation of "homegrown" games, and a deep understanding of what its customers desire.
CEO Jason Robins commented on the introduction of its new MLB same-game parlay offering in its Q2 Earnings Call :
Yeah. I think first of all, MLB itself has made some great changes that have helped increase engagement with the stores, so they get the credit for that. But I think betting has helped a lot too. And MLB first of all, is very well built for live betting. So that's been a real product that works very well with that sport and we're excited about the offering we have there this year. Also, the same game parlay product has been significantly enhanced this year.
While DraftKings' moat is strong through its sticky business and successful product market fit, low switching costs can pose a risk in the future. With many substitute products available, users do not incur any "costs" or hardship from switching from one sportsbook to another. It is not uncommon for casual and frequent sports bettors to have multiple sports betting apps.
Further, as legislation continues to grow and the battle for market share intensifies, online gaming companies are offering more and more free bet promotions through email blasts, text messages, and advertisements.
Who doesn't want free slot spins or a potential "Freebie" bet that a sportsbook offers?
In essence, it is a variation of the "Bait & Hook" business model, where sportsbooks offer first-time customers major incentives through free bet credits or "Super Boosts" where they (sportsbooks) will lose money, in hopes of acquiring customers and generating more revenue in the future.
While DraftKings remains in a strong position through a great product and growing users, low industry switching costs can pose a future challenge to the company.
The Battle of Market Share
As industry tailwinds fueled by legislation and interest in gaming continue to propel the online sports and iGaming industry, market share is a critical metric in a company's success.
As of Q1'23 , DraftKings boasted the #1 market share in GGR (Gross Gaming Revenue) in the iGaming space. Within OSB (Online Sports Betting), DraftKings' total handle share was 35%, whereas OSB GGR market share was 32%, second to Flutter Entertainment's (PDYPY) owned FanDuel.
OSB Market Share (Company Filings)
I know - I just threw a curveball at you with some non-traditional financial terms such as handle and GGR.
In the gambling world, the handle is the total amount wagered by bettors. In DraftKings' case, 35% of online sports wagers in the US are facilitated through DraftKings. GGR, also referred to as game yield, is the difference between the amount of money wagered and the amount of money a casino or sportsbook pays out in winnings to its bettors.
Ideally, sports betting companies want their handle share to match their GGR share (also known as the hold). This is due to the fact that if their GGR share is lower than their handle share, all else equal, there are other sportsbooks that have higher hold percentages and do a better job keeping a higher percentage of wagers as revenue.
When asked about it in Q2'2023 earnings, CEO Jason Robbins didn't seem too concerned about the discrepancy.
As far as hold rate goes, we're continually working to improve that. We've obviously closed the gap quite a bit between handle share and GGR share, and I have no reason to believe that we can't continue to do that.
DraftKings has done a great job quarter-over-quarter increasing its market share across all pillars of the business. Further, as depicted by the chart below, it has closed the gap between its OSB handle share and GGR share in 2023.
Ultimately, as favorable legislation continues to drive sports betting and iGaming to new heights, the battle for market share amongst online betting companies will continue to intensify as they find new ways to attract and retain users on their respective platforms.
Monster Growth - Is it Built to Last? (1-Day)
It's no secret that DraftKings has witnessed exceptional growth since IPOing in 2019.
Revenue Growth (Company Filings)
In the last 2 quarters alone in 2023, YoY revenue growth has been astronomical.
QoQ Revenue Growth (Company Filings)
While profitability has not been achieved yet, losses are shrinking. Similar to many high-growth companies, DraftKings has aggressively invested in its sales & promotional efforts with the intention of growing its user base along with revenue.
As we mentioned earlier, the battle for market share will continue to intensify as favorable legislation and the adoption of sports betting become more widespread. Thus, it is no surprise that DKNG continues to invest heavily in its marketing spend. The aggressive spending on sales & marketing is not necessarily a negative sign for shareholders. On the contrary, for less mature growth companies, aggressive spending is critical in the earlier stages of a business.
It's important to note that DKNG's sales and marketing have declined on a relative basis as a percentage of revenue. YTD, they have only spent about a third of revenue on sales and marketing, demonstrating improved YoY efficiency as exemplified in the chart below.
S&M as % of revenue (Company Filings)
Since Q1'2022, DraftKings management has continued to raise their guidance in each earnings report. Most recently in Q2, the company once again raised its full-year outlook, expecting a strong fourth quarter fueled by NFL, NCAAF, & NBA which will derive $1.2B from the three fan-favorite sports leagues.
We are increasing our full year revenue guidance to a range of $3.46 billion to $3.54 billion, implying growth of 56% year-over-year at the midpoint.
Our fiscal year 2023 revenue guidance includes our expectation of nearly $1.2 billion of revenue in the fourth quarter of 2023. We are also improving our full year adjusted EBITDA guidance to a range of negative $190 million to negative $220 million, an improvement of 35% at the midpoint versus our May full year guidance
Competitive Landscape
There is no doubt DraftKings is continuing to take the right steps with respect to increasing market share, benefiting from legislation, acquiring new users, and consistently improving its product with unique offerings.
Nevertheless, competition remains strong in both the OSB and iGaming industry. Notable public competitors include BetMGM, Flutter Entertainment, Caesars ( CZR ), and Boyd Gaming ( BYD ), to name a few.
Competitor Market Capitalizations (Company Filings)
While MGM, Boyd, and Caesars own and operate properties and are heavily focused on land-based gaming, Flutter is the only pure-play digitally focused competitor to DraftKings. Nevertheless, the three land-based gaming companies all have a stake in the iGaming and OSB markets. While Flutter and DKNG dominate over 75% of the digital market, the latter must ensure it does not rest on its laurels with its current success.
Moreover, Flutter Entertainment's product depth is vast, owning a host of well-renowned brands such as FanDuel, PokerStars, and Skybet to name a few.
While the aforementioned competitors do have established brands and longer industry tenure, DraftKings has continued to outshine them with respect to revenue growth on a 3 and 5-year timeline.
Final Thoughts
To recap, the twin engines that will ultimately fuel DraftKings' growth continue to penetrate its existing markets while driving user growth in new states.
DraftKings continues to innovate its product offerings to its customer base. Market share metrics remain strong as DKNG continues to acquire and retain users across existing and new markets. However, low industry switching costs can create a challenge for DraftKings if it does not continue to remain innovative and expand its product offerings over time.
Competition in the US Online gambling market remains stiff, and the battle for market share will only become more fierce as favorable legislation drives online sports betting and iGaming to new heights.
While there is no questioning the impressive growth from DraftKings , the question lies in whether the market has already baked in this future forecasted growth as expectations for the online gaming company are high. While the company is down from its all-time high in 2021, I believe the market is still underestimating potential future challenges that DKNG will have to navigate in the future.
Thus, I will be instituting a "Hold" recommendation on DraftKings. The company has had a wild ride YTD, up around 175%. While I will keep the company close on my watchlist and track its growth on a QoQ basis, there is still quite a bit of future uncertainty which prevents me from initiating a position at its current value. I will be waiting for a pullback prior to pulling the trigger.
For further details see:
DraftKings: Don't Go All-In Just Yet