DraftKings: Strong buy-the-dip opportunity
Summary
- Investment Thesis
- DraftKing business model
- Gambling sector state of play
- DraftKing state of play & long term catalysts
1. Q1FY22 analysis
2. Long term catalysts - The bottom line
Investment Thesis
DraftKings (DKNG) is a leader and continuously increasing the gap by a fast-growing online gambling platform that provides users with daily fantasy sports, sports betting, and iGaming services.
DraftKings, the prime beneficiary of the pandemic in which many fans stuck at home with nothing better to do resulting in multiplied active players and average spending more than the prior years. Entered in 2021 with COVID tailwind and rallied after signing a contract to be the official sports betting partner of the NFL.
Ever since notching highs above $74 in mid-March. Since then, it has retreated from the peak and shed ~40% of its market value.
Looking at the company’s fundamentals, sector future growth, and Q1 beat-and-raise, it the perfect candidate for “buy-the-dip”.
DraftKing business model
DraftKing is an online sports platform that provides users with daily fantasy sports, sports betting, and iGaming services. In addition, it provides B2C offerings and B2B offerings.
B2C products include Daily Fantasy Sport, Sportsbook and iGaming.
- Daily Fantasy Sports is a p2p platform in which players compete against one another for prizes.
- Sportsbook provides sports betting, in which users wager money on an event at fixed odds.
- iGaming is an online casino, which includes games available in offline casinos, such as blackjack, roulette, and slot machines.
B2B products include iGaming and sports betting services for gaming operators and government lotteries.
Gambling sector state of play
The global online gambling market is expected to reach USD127.3bn by 2027, posting a CAGR of 11.5% from 2020 to 2027, according to Grand View Research.
Online betting is the fastest-growing segment in the forecast period due to
For example, in 2018, the first full year of legal sports betting in the US, USD13bn was wagered, according to the AGA. Even more impressive was that 2019’s figure was double that of 2018’s.
To help relieve the pressure from economic shutdowns, several states are pushing for online gambling legalization to tap the lucrative source of tax revenue. Last November’s election results revealed that voters largely approved legalized sports betting and other gambling activities. Over 25 states have already legalized online gambling and sports betting. April 2021, NY pass it so quickly that many are still trying to grasp the speed at which it passed.
DraftKing state of play & long term catalysts
Q1FY22 analysis
DraftKings is on the fast track to being in the black/positive cash flow. The company lost USD3.26/share in 2019, and USD2.76/share in 2020. The current consensus calls for a loss of USD1.42/share in 2021 and USD1.00/share in 2022.
On Feb. 26, it lifted its 2021 outlook after reporting mixed 4Q results with revenue came in at USD322mn, up 146% YoY or 98% on a pro forma basis. The average revenue per monthly unique payer advanced 55% to USD65. Average monthly unique payers jumped 44% YoY to 1.5mn.
The company raised its 2021 revenue target to USD900mn-USD1bn from its previous target of USD750mn-USD850mn. The consensus estimate is USD827.8mn.
Despite a lack of earnings, it has massive revenue growth and is a leader in the online betting megatrend.
Long term catalysts
- Expanded territories drove by additional legalizations. DraftKings currently only operates in states representing only around ~25% of the U.S. population in 2020. By the end of 2021, driven by additional legalizations, DraftKings expects to expand its coverage to ~35%.
- Direct agreements with the biggest names in sports cement DraftKings’ leadership in its space. DraftKings has signed recent partnerships that make it the exclusive sportsbook provider for ESPN, Turner Sports, and individual leagues like the PGA showcase the fact that DraftKings is the leader in sports betting.
- A variety of sports and formats leads to a broad market. DraftKings has something for everyone. Though anchored by big sports like football, DraftKings also has other sports including golf, NASCAR, basketball, and MMA. DraftKings also has fantasy formats as well as direct online sports betting as well as offerings in casino gaming.
- Opportunities through b2b products.
The bottom line
When looking at its financials, the USD21bn market cap appears pricey by some measurements. However, the company is successfully capitalizing on the surging demand for online betting and a favorable regulatory environment. DraftKings should quickly grow into its valuation with relative ease.
In my view, DraftKings continues to execute in high gear, with the company continuing to add a raft of new users while also driving much higher engagement and per-player revenue. New features like DraftKings social should serve to make the platform even stickier. Longer-term, the inherent growth that lies ahead for DraftKings through state legalizations will continue to drive revenue scale and optimism for this stock.
Stay long here and use the recent crash as a buying opportunity.
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