DraftKings Investment Thesis

DraftKings inc (NASDAQ:DKNG) went public via a SPAC reverse merger in April 2020 and has more than tripled in value since. The company’s market capitalization north of $20 billion is a sign of optimism about the legalization of gambling across each state in America, and DraftKings revenue model more broadly.

Goldman Sachs (GS) repeated a Buy rating at a price of $73.00, and even Ark Investment’s Cathie Woods holds several positions in the company through its funds, so what is the DraftKings investment thesis?

The company is involved in two industries that have thrived in recent times – sports betting and fantasy sports. Sports betting is on a growth trajectory since the U.S. Supreme Court allowed states to determine legality on their own.

It triggered an avalanche of states legalizing it, and DraftKings CEO Jason Robins smartly pivoted the fantasy sports platform to accommodate these legal changes. The fantasy sports market is estimated to grow to over $1.5 billion by 2024, compared to the larger $203 billion sports betting market in 2020.

But what really determines the value of DraftKings is just how much of those two markets it controls. 

DraftKings Market Share

So far, DraftKings operates in 12 of the 18 states in which sports betting is legal. This means it has access to about two thirds of the available U.S. market, and we’re just focusing on the legal market. There’s a large black market online betting industry, and it’s a problem that DraftKings and other legal businesses are combatting.

Analysts at the American Gaming Association report over $150 billion worth of illegal bets are placed each year. Migrating those bets to a legal platform takes a sleek user interface on the front end and a reliable clearinghouse on the back.

And the company is limited to the whims of local regulators. It will wade through some expensive legal paperwork as each state passes laws to legalize, but it often takes localized lobbying efforts to make those changes happen.

This is true in vice industries like cannabis too, but online sports betting grew especially fast when stay-at-home orders were issued. 

DraftKings posted a loss of $266.4 million (or $0.24 per share) for the fourth quarter of 2020 because of these expenses. However, fourth quarter revenue grew from $162.6 million in the fourth quarter of 2019 to $322.2 million the next year.

It illustrates how strong growth can be a virtual world, but some analysts worry a recovery could weaken the company’s upward trajectory. And competitors from Las Vegas casinos to cruise ship operators are opening their doors to online gaming.

The company needs a moat to protect itself from the competition.

Does DraftKings Stock Have a Moat?

League integration is going to play a key factor in the long-term success of sports betting platforms moving forward. And DraftKings started 2021 with an MMA partnership.

Its deal to become the official sportsbook of the Ultimate Fighting Championship makes it clear that DraftKings plans to be around over the long run. The five-year deal, valued at $350 million in marketing and cash, integrates the two as league and sponsor in a competitive landscape.

DraftKings already has a deep relationship with the NFL that it leverages to become the official sportsbooks for many casinos. It also has deals with Turner Sports and Bleacher Report to integrate content, and it’s investing further in technical infrastructure.

This protects it by not trying to compete with existing resorts but instead partnering as a source of information. These partnerships are leading to revenue growth in the company that already provided healthy returns to early investors.  

However, it’s not the only company on the block. FanDuel is included in the Turner deal and provides odds and other valuable data.

Everyone’s working together for the time being, but it could take a different turn if anything negatively impacts the market and forces them to fight for pieces of a smaller pie.

Is DraftKings Growing Revenues?

DraftKings blew past expectations for 2020 and raised its guidance for 2021, signaling the tremendous possible growth potential. Not only is the platform growing revenue, but more states are opening the floodgates to allow legal sports betting online.

The deals to integrate branding within media outlets and leagues ensures DraftKings becomes a household name. Robbins hopes this could destigmatize the industry as a whole and open more states to the idea.

Fans love the ability to research and place bets on their smartphones in the moment as events are happening. This is why forecasts for 2021’s full-year revenue raised to $1 billion after 2020 results posted.

By the fourth quarter of 2020, DraftKings drew an average of 1.5 million unique paying customers per month. It wasn’t an easy road to get there, especially with government shutdowns of most global sports for at least some part of the year.

People needed a distraction through a year that also included the shutdown of travel and many video game, movie, and TV productions.

Of course, Dave Portnoy’s Barstool Sports is joining a field of about a dozen other players hoping to cash in on the same market. The more players who jump in the more likely DKNG growth will be stymied.

What Rate Are DraftKings Earnings Growing?

DraftKings revenues are growing, and the year-over-year comparison of fourth quarter results show over 100 percent growth. However, earnings are a different story and remain negative. Management is investing in heavily in building a base of customers and that is hurting the bottom line, so far.

Leadership did raise guidance for 2021 by 25 percent through the first quarter, and it got a boost after being included in the ARK Next Generation Internet ETF (ARKW).

Predicting a decade of growth isn’t easy though, as legal sentiment could shift over time. It takes a strong management team to steer a company through such rocky waters.

DraftKings Management Quality

So far, the leading performance of DraftKings illustrates the competency of its management team. Sports betting is a relatively new industry, and that leaves a lot of room for players to pioneer innovative growth and customer retention strategies.

DKNG management has figured out that it can make money from both retail gamblers and licensing. The executive team is rated highly in workplace review sites like Comparably and GlassDoor, showing the overall health of the company culture.

It most recently named Jennifer Aguiar as Chief Compliance Officer, and it should continue to flourish as it expands. Of course, there are some headwinds facing the company, especially since it operates in a vice industry.

Challenges Facing DraftKings

DraftKings has a lot of competition nipping at its heels. There is an increasingly larger pool of companies vying for a piece of the sports betting market.

On top of this, regulations and legislatures could switch direction against legalized gambling. This would slow the company’s growth potential as well.

And any type of potential security breach could be devastating for the company. We’ve already seen PR disasters for companies like Robinhood.

DraftKings Investment Thesis Conclusion

DraftKings is a strong contender in a growing sports betting market. The app has a great design, branding is integrated into leagues and media, and the company is on a growth trajectory with revenue. ARK funds and other buying into it increase the credibility of the stock as a longer term holding with serious upside potential.

However, gaming and sports betting are volatile industries. Economic recovery changing consumer attitudes, a flood of competition, and changes in government opinion are all potential growth limiting factors.

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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.