DraftKings Q3 earnings: Stronger than expected guidance

DraftKings’ Q3 earnings results were strong, as was its guidance. Canaccord Genuity analyst Michael Graham said the company also guided for 2021 revenue that was significantly higher than expected. That higher-than-expected guidance was despite the lack of any new states.

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 2020 hedge fund letters, conferences and more

Positive setup for DraftKings after Q3 earnings

Graham believes the DraftKings' marketing spend is working well as it attracted 726,000 monthly unique payers to the platform during the third quarter. He also believes the company's stock is well-positioned for the fourth quarter and 2021 as the end of NFL season approaches and lockup expirations occur by early January. Graham also noted that the first half of next year could see a more robust sports calendar, and more states could legalize online sports betting.

Michael Mauboussin’s 10 Attributes of Great Investors [Pt.1]

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkIn 2016, Michael J. Mauboussin completed his 30th year on Wall Street. The analyst, who was working at Credit Suisse at the time, decided to celebrate by reflecting on the ten attributes of great investors he had observed over the previous three decades. He published his ideas in a report in August 2016. I've summarised Read More


He expects DraftKings to keep spending significant amounts of money on marketing into next year, resulting in share gains and the ability to reinvest in product development. According to Graham, next year could be an exciting one for the company amid the switch to internal SBTech technology and the related ramp of live betting offerings.

Increase in MUPs

According to the Q3 earnings report, DraftKings had 1.02 million monthly unique payers at the end of the quarter, marking a 64% increase year over year. The sequential addition of 726,000 payers followed heightened marketing investments and a much busier sports calendar. Average revenue per monthly unique payer declined 6% year over year to $34.

Graham attributed that to low NFL hold due to adverse outcomes and promotional activity. The result was $99.5 million in B2C revenue, which marks a 59% year-over-year increase on a pro forma basis. DraftKings management said user growth was especially strong in August and September during the NBA and NHL playoffs.

Further, Illinois is now the company's second largest market by handle. DraftKings acquired new customers there after the governor decided to suspend in-person registration requirements. During the third quarter, the company also launched Best Ball, a season-long DFS format featuring snake drafts for the NFL season. DraftKings plans to roll out version of Best Ball for basketball and hockey. It also rolled out new versions of blackjack, roulette and baccarat for its online casino.

DraftKings boosts guidance in Q3 earnings report

During the third quarter, the company launched online sports betting in Illinois and online gambling in West Virginia. DraftKings then launched online sports betting in Tennessee, making it the tenth state in which the company is now live. It reaches about 20% of the U.S. population.

The company also raised its revenue guidance for fiscal 2020 to between $540 million and $580 million, compared to the previous range of $500 million to $540 million. That's higher than the consensus of $527 million and implies 25% to 30% growth year over year. The boosted guidance is due to the resumption of college sports and faster-than-expected contributions from Illinois. However, the gains will be partially offset by the likely delay of the NBA and NHL seasons into early 2021.

For the fourth quarter, DraftKings expects its adjusted EBITDA loss to be a little over half of the loss incurred during the third quarter. The company also introduced revenue guidance for fiscal 2021 at $750 million to $850 million, which would be 45% growth at the midpoint. Graham maintained his $65 price target and Buy rating on DraftKings stock.