Is This The Best Sports Betting Stock to Buy?

DraftKings Inc. (NASDAQ:DKNG) leads in the digital sports entertainment and gaming industry, offering daily fantasy games, legal gaming services, and digital media content. It is the only company in the United States that incorporates every part of the sports betting business internally.

The global online sports betting market is forecast to generate $45.94 billion this year and by 2029 180.8 million people will be involved, resulting in a CAGR of 7.41% to $65.68 billion.

Against this long-term backdrop, DraftKings has risen by 26% in the past half-year and nearly 80% over the past twelve months, so is it just the beginning of a long-awaited resurgence?

DraftKings Building Share Price Floor

In March, DraftKings launched My Stat Sheet, which gives players the power to make data-informed choices and supports safe play. It’s also a nod to DraftKings’ focus on responsible gaming and should engender confidence among investors that the company has the long-term best interests of users and shareholders in mind.

In the same month, the company also revealed its intention to start a top-rated online sportsbook in North Carolina that further demonstrated its commitment to safe sports wagering.

As the company works closely with regulators, a floor on the share price is slowing being built because it mitigates risk of a medium-term rug pull by those in power.

In the same state, DraftKings cemented a deal with NASCAR earlier in the year. So now DraftKings is featured in 27 states in the United States as well as in Ontario, Canada. 

Management has also been active in the acquisitions market. In February, DraftKings completed the purchase of Jackpocket, a top lottery app in the United States, for $750 million. This purchase allows DraftKings to enter into the profitable American lottery market and also improves its Sportsbook and iGaming services.

What Do DraftKings’ Financials Reveal?

In Q1, DraftKings saw a big increase in its business. Revenue climbed by 52.7% compared to the same time last year, hitting $1.17 billion.

Adjusted EBITDA was also much better at $22.39 million. Last year, a loss of $221.61 million was posted during the same period.

Earnings per share flipped positive with a $0.03 report compared to a loss of $0.51 per share a year ago.

And DraftKings showed strong performance in important measures, such as the number of Monthly Unique Payers that rose to 3.4 million, a 23% rise compared to the first quarter of 2023. 

The average revenue per Monthly Unique Payer increased to $114 in Q1 2024, a rise of 25% compared with last year at this time. This increase stemmed from the firm doing a better job at keeping sportsbook bets and also investing more back into promotions.

The Future Looks Even Better

DraftKings upgraded its revenue forecast to between $4.8 billion and $5.0 billion for the year.

Management estimates that adjusted EBITDA will land between $460 million and $540 million during this time, a 53% increase compared to the previous year due to core value drivers and attempts to improve profit margins.

They expect adjusted gross margin will improve too and increase to between 45% and 47% for the current year, a rise of 350 basis points compared with FY 2023. They also predict that there will be about $400 million in free cash flow, leading to cash reserves at the end of the year close to $1.6 billion.

Intra-year, DraftKings expects that revenue will rise by roughly 25% in the second quarter and then by around 30% in both the third and fourth quarters.

Adjusted EBITDA is set to come close to $150 million for the second quarter, just about breakeven in the third quarter, and should surpass $325 million during the last quarter.

Is DraftKings Profitable?

While adjusted EBITDA and EPS have flipped positive, DraftKings has had a long history of reporting bottom line figures in the red.

For a full five years, EBIT has been negative and we couldn’t find a single quarter over the past 5 years where operating income came in above water.

Gross profit margins have also declined over the past few years and hover now around 40%, down from 70% a few years ago.

With net income not expected to turn positive soon on a GAAP basis, investors are fully reliant on revenue growth to swing the pendulum in its favor, and that does look good with a 5-year CAGR forecast of 17.1%.

Is DraftKings The Best Sports Betting Stock to Buy?

DraftKings is probably the best sports betting stock to buy because it is the only one that is fully vertically integrated. 35 analysts expect that the share price can rise by about 20% to $52.38 per share.

In the last three years, DraftKings has shown very strong growth. The revenue went up at a CAGR of 69.3%, and the levered free cash flow grew at a 153.8% CAGR. Also, the company’s revenue rose at a 74.5% CAGR over the past five years.

For the second quarter of fiscal year 2024, which finishes in June 2024, analysts are predicting a 25.8% increase in revenue from last year to $1.10 billion, with adjusted EPS estimated at $0.02.

Likewise, for the third quarter of fiscal year 2024, ending in September 2024, it is expected that the company’s revenue will rise by 30.6%, reaching $1.03 billion.

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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.