DraftKings (NASDAQ:DKNG) has been one of the largest beneficiaries of legalized sports betting in the United States. The stock, however, is down more than 30 percent in the last three months on a combination of reduced revenue guidance and concerns around competitive pressures. Today, let’s examine the question of whether or not DraftKings has a moat around its business to see if the stock could be worth buying while its prices remain low.
Is DKNG Part of An Oligopoly
In terms of US sports betting, DraftKings’ primary competitor is FanDuel, owned by parent company Flutter Entertainment. FanDuel does have the advantage when it comes to US market share, with about 43 percent of the American sports betting market going to FanDuel and about 25 percent going to DraftKings. The remainder of the market is accounted for by a combination of smaller platforms like Caesars and BetMGM.
Although DraftKings lags FanDuel, it’s important to recognize that the US sports book market has become a near-duopoly between the two. As one of the two large players, DraftKings does have something of a competitive moat, though it probably isn’t as strong as the one surrounding FanDuel.
Another feature of the betting landscape at the moment is the rise of the so-called prediction market, which allows bettors to wager on the outcome of non-sports events like elections, interest rate movements and even the outcomes of major entertainment awards. Both DraftKings and FanDuel have made moves to get out in front of this market, with DraftKings acquiring prediction market firm Railbird in October as part of its effort to build its own prediction offering in the coming months.
Even though this market is on the rise and DraftKings is clearly taking an interest, CEO Jason Robins has said that he doesn’t see prediction markets as a threat to more traditional sports betting. Instead, prediction markets could offer DraftKings a way to complement its own core sports book business, rather than being a competitive problem for it.
Putting all of this together, DraftKings’ moat looks reasonably solid, especially when one takes into account the expected growth in the US sports betting market over the coming several years. US sports betting is expected to expand by nearly 40 percent between now and 2030, more than doubling the growth rate of the more established European and Asian markets. With their dominance over the market in America, both DraftKings and FanDuel are positioned as major beneficiaries of this trend.
Is DraftKings’ Competitive Position Translating to Growth?
Another extremely important question to ask is how DraftKings’ market position is showing up in its financial performance. In Q3, DraftKings reported a 2 percent growth in monthly unique payers to 3.6 million. Average revenue per MUP, meanwhile, advanced 3 percent to $106. Total revenue for Q3 was up modestly, rising from $1.095 billion in the year-ago quarter to $1.114 billion. DraftKings also made progress in thinning its losses, with total net loss dropping from $298.6 million in Q3 of last year last year to $271.9 million.
Even with these advances, though, DraftKings did revise its revenue guidance for the year downward in Q3. In Q2, management had offered revenue guidance of $6.2 billion to $6.4 billion for the full year, accompanied by expected EBITDA of $800 million to $900 million. In Q3, the guidance was updated to revenue of $5.9-$6.1 billion, accompanied by much lower EBITDA in the range of $450 million to $550 million. Even so, it’s worth keeping in mind that even the lower guidance translates to revenue growth of 24-28 percent when compared to 2024’s total revenues.
While net income remains negative, DraftKings is making significant progress when it comes to cash flow. In the first nine months of the year, the business generated $342.4 million in operating cash flow, compared to just $92.6 million during the same period last year. By 2029, ongoing cash flow improvements are expected to bring free cash flow to as much as $2.5 billion.
Is DraftKings a Good Value?
Although DraftKings is still losing money, its ongoing growth may be attractive from a valuation perspective. At 2.8 times trailing 12-month sales, DKNG is trading well below the P/S ratios it has averaged over the past couple of years. Given the growth trends in American sports betting expected over the next several years and the already strong cash flow growth DraftKings is generating, this could leave the stock undervalued at current prices.
Analysts also expect DKNG to go much higher, as reflected by the consensus price target of $49.67. Given that DraftKings’ most recent price was $30.40, this target implies an upside of well over 60 percent. Also encouraging is the fact that the lowest price target for DKNG is $30, suggesting that the stock may offer an asymmetrical risk proposition. Unsurprisingly, the consensus rating for DraftKings is still a buy, with 23 analysts offering buy ratings on the stock and just five rating it as a hold.
Is DraftKings a Buy?
Overall, DraftKings does still seem to have a fairly strong moat around it as one of the two dominant sports betting platforms in the United States. Even with downgraded revenue expectations for 2025, DraftKings is still growing, increasing its average revenue per user and delivering very strong cash flow expansion.
Another major positive point for shareholders is DraftKings’ enhanced share buyback program. In Q3, management announced that it would increase the already substantial authorization of $1.0 billion to $2.0 billion in authorized buybacks. Considering that DraftKings has a total market cap of $15.1 billion, this new authorization accounts for over 13 percent of its market value.
Taking all of this into account, DraftKings may be a decent stock for risk-tolerant investors to look at while it’s sold off. Even without the market dominance that FanDuel enjoys, DraftKings could be a good stock to own for the long haul at today’s prices. This is especially true considering the opportunities DraftKings could unlock in the prediction market, which could prove to be an attractive addition to its overall betting business.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.