Should Investors Bet on DraftKings?

Published on

Sportsbooks in Nevada took in $185 million in bets on the Super Bowl last Sunday, the biggest number ever for the big game in that gambling center. One of the largest online sports-betting platforms in the country, DraftKings (NASDAQ:DKNG), took in a good portion of that action.

However, since DraftKings posted its earnings on Thursday, the focus now turns to its results. Should investors place their bets on DraftKings stock? Let’s take a look at its earnings and outlook and see whether or not its a buy right now.

A rollercoaster ride for DraftKings   

DraftKings stock was a juggernaut in 2023, skyrocketing 209%, and this year it is off to a strong start, up about 32% year to date to roughly $44 per share. It should come as little surprise, given the rapid growth of online sports-betting in the U.S. and its position as one of the leaders in the space.

However, the stock has not been able to get back to the level it was at in 2021, when it topped out at just over $71 per share. The late-2021-and-2022 bear market took a huge bite out of DraftKings’ value, as it bottomed out in the fall of 2022 at around $10 per share.

The company posted its fourth-quarter and year-end earnings on Thursday afternoon, and while it reported strong revenue growth, it fell short of analysts’ expectations. As a result, its stock was trending slightly lower on Friday morning.

DraftKings’ revenue rose 44% in the quarter to $1.23 billion, which was only slightly below the consensus estimate of $1.24 billion. Revenue generation was aided by a continued expansion into new states.

In the fourth quarter, Maine approved online sports-betting, becoming the 23rd U.S. state where DraftKings is available. The company added a 24th state, Vermont, in January. This expansion and its efforts to improve engagement and retention helped DraftKings increase its monthly unique payers (MUPs) by 37% in the quarter, rising to an average of 3.5 million. Further, the average revenue per MUP was $116 in the fourth quarter of 2023, up 6% year over year.

However, the bottom line came in well below expectations, as DraftKings reported a net loss of $44 million, or 10 cents per share. This is substantially better than the $243 million net loss in Q4 2022, but it was far below the profit of 8 cents per share that analysts had predicted. However, DraftKings did report positive adjusted EBITDA of $151 million.

The company also reported a significant 47% year-over-year jump in cost of revenue to $717 million, along with higher product and technology and general and administrative costs. Of course, rising expenses are not unusual for a growing company, and while not as fast as analysts have been expecting, DraftKings is making strides toward profitability. For context, it had a $153 million adjusted EBITDA loss and a $283 million net loss in the third quarter of 2023, so it is headed in the right direction.  

For the full year 2023, DraftKings saw its revenue spike 64% to $3.665 billion while posting a net loss of $802 million or $1.73 per share, which is down from a net loss of $1.378 billion in 2022.

More states expected to approve sports-betting in 2024

When you consider that DraftKings is only in about half of U.S. states at present, there appears to be tons of growth opportunities ahead.

This year alone, Vermont has already approved sports-betting, and North Carolina is set to go live on March 11. In addition, DraftKings is expected to launch as an option in Puerto Rico this year. Meanwhile, another seven states, representing approximately 11% of the U.S. population, have either introduced bills to legalize online sports-betting or put a referendum on their ballots, according to DraftKings.

Based on the results it has seen in the first six weeks of 2024 and strong customer acquisition in the fourth quarter, DraftKings has raised its revenue and EBITDA guidance for 2024. Specifically, it has boosted its fiscal-2024 revenue guidance to a range of $4.65 billion to $4.9 billion, up from the previous range of $4.5 billion to $4.8 billion. The updated guidance would equal year-over-year growth of 27% to 34%.

The company also projects adjusted EBITDA of between $410 million and $510 million for 2024, compared to its previous estimate of $350 million to $450 million. This is significant, as DraftKings had a $151 million net loss in adjusted EBITDA in 2023.

New acquisition and long-term expectations

Importantly, these estimates do not include DraftKings’ just-announced acquisition of Jackpocket, a company that allows users to play the lottery on an app. DraftKings paid $750 million for the company. It expects Jackpocket to generate $260 million to $340 million of incremental revenue and $60 million to $100 million of incremental adjusted EBITDA in fiscal 2026. 

Looking longer term, CEO Jason Robins said in his shareholder letter that the company is on track for $6.2 billion of revenue and $1.4 billion of adjusted EBITDA in 2026 and $7.1 billion of revenue and $2.1 billion of adjusted EBITDA in 2028 — from its existing states alone. This is not counting contributions from Jackpocket or any additional states that legalize sports-betting between now and then.

There is no doubt that there is tremendous upside potential with this stock. I’d just be a little wary of its higher valuation, with a price-to-sales ratio up above 6 from 2.6 at the end of 2022. The consensus estimate among analysts is for the stock price to remain relatively flat from current levels over the next 12 months. However, there may be a better opportunity to jump on this grower after a dip.