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The digital sports betting market is seeing a significant shift, particularly with ESPN’s recent entry in November through the acquisition of PENN Entertainment’s online betting business. In this ever-evolving market, DraftKings, which is currently second to FanDuel in market share, has recently made its own strides to grow its business despite several economic headwinds.
Over the past year, the company has rolled out several new features, expanded into new markets, and improved its business efficiency, leading to higher margins. All of these factors have propelled the company’s stock over the last year, but can the company continue to justify its valuation going forward given the increased completion and high costs of keeping its customers on the platform?
Drafting A Win
DraftKings operates in the digital sports entertainment and gaming sector and is renowned for its broad spectrum of online betting and gaming products, including the Sportsbook, iGaming, daily fantasy sports, and more, creating software for sports betting and casino gaming, both online and for retail operations.
The company is projecting that the Online Sportsbook and iGaming market to reach $20 billion in 2023 and further expand to $30 billion by 2028 in its current markets. DraftKings has currently captured 37% of the Sportsbook Market, placing it second only to FanDuel, which holds a 45% share. In the iGaming market, DraftKings has secured a 26% market share.
The company’s rapid growth is driven by its diverse offering in sports and formats, ranging from popular games like Football and Basketball to less followed sports like NASCAR, MMA, and Baseball. DraftKings is also looking to stand out in the highly competitive market, by focusing on differentiating its iGaming products. This includes integrating live dealer and jackpot features, and introducing innovative offerings like in-house same-game parlays and live betting options across major sports leagues.
DraftKings expects to significantly grow in the future as a result of future legalization and expansion into several states. Over 15 states in the U.S. have yet to legalize Online Sportsbook (OSB) or iGaming markets, including significant markets like California and Texas. Moreover, DraftKings is yet to launch its Online Sportsbook or iGaming business in an additional 15 states.
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Changing the Game
Despite DraftKings taking strides in its revenue growth and seeing a clear path to profitability, the company faces significant challenges with ESPN’s entry into the already competitive digital betting market. ESPN, which previously invested $75 million annually in marketing for DraftKings and Caesars, severed these ties after acquiring PENN Entertainment’s online betting business for $2 billion, positioning the business to launch its own online betting app, a concept it has contemplated for years.
While some market analysts see ESPN as a late entrant in the industry, its robust brand recognition and customer loyalty could draw a substantial user base. The integration of ESPN’s current app with live game streams, coupled with sports book features like player and team stats and schedules could be a compelling proposition. ESPN+, the company’s direct-to-consumer platform, already boasts over 25 million customers, approaching the estimated total of 31 million sports betting users in the U.S.
Launched in November across 17 states, ESPN Bet aims to leverage Penn’s commitment to integrate the sportsbook with its massive monthly user base of over 200 million in the U.S., including 12 million regular users of ESPN’s fantasy sports app. Additionally, Penn is capitalizing on 2 million digital registrants and 27 million customer loyalty members from its various platforms, including Barstool Sportsbook and Hollywood Casino.
ESPN’s entry into the market is a clear threat to DraftKings’ business, especially considering the low switching costs in the betting market. With the financial backing of Disney and ESPN’s focus on market share expansion over immediate profitability, DraftKings may face a loss in market share due to ESPN’s aggressive customer acquisition strategies. On the other hand, DraftKings could respond with comparable or more extensive promotions to thwart the threat, which could potentially impact its margins in the medium term.
Financials and Valuation
In the third quarter of 2023, DraftKings surpassed analyst expectations in both revenue and earnings per share. The company reported a significant 57% increase in revenue, reaching $789 million, and an improvement of 39% in EPS, reporting a loss of $0.61/per share. For the full year, DraftKings’ management is projecting revenues to hit approximately $3.69 billion at the midpoint, marking a 64% improvement year-on-year. The company also anticipates generating an EBITDA loss of $105 million for the full year, which is a substantial recovery from the $721 million loss in 2022.
The surge in revenue is attributed to the 40% annual increase in monthly unique payers, now totaling 2.3 million, and a 14% rise in average revenue per unique payer, currently at $114, indicating strong customer retention and spending power on the platform despite several economic challenges. Looking ahead, the company expects to generate revenues of $4.65 billion in the upcoming year, indicating a 26% increase, and aiming to achieve EBITDA profitability of $400 million.
The company’s shares have seen a significant rally of 161% through the year and are currently trading at close to $39, giving the company a market capitalization of close to $18.2 billion. Based on this, DraftKings is trading at a Price/Sales ratio of 5.4x, which may appear steep, considering the rising competition and concerns about long-term margin sustainability.
However, the company’s consistent growth trajectory, coupled with potential expansion opportunities through legalization in new states and margin enhancement from reduced operating costs, could create value in the future.
Bottom Line
DraftKings’ stock has experienced a notable surge over the past year, driven by its expanding market share, enhanced margins, and continuous efforts to enhance user experience through new feature introductions. However, the company now faces a significant challenge with the entry of ESPN in the market. ESPN’s vast scale and distribution network could significantly boost its market share, potentially affecting DraftKings’ margin or market share in the medium term.
While DraftKings has consistently outperformed market expectations with significant revenue growth and margin improvements, its valuation has outpaced its growth trajectory. Despite concerns of being overvalued, DraftKings’ potential to maintain its revenue growth and achieve profitability could still offer value to its shareholders in the future.
Source: Bet On It