DraftKings: Ready to Dominate

October 25, 2022
Information Technology

Fewer sectors have been more volatile during this bear period than that of sports betting. Following a massive boom in the industry when gambling on sports finally was approved in huge markets like New York — a bunch of online betting companies jumped on the SPAC train and exploded across the back half of 2021.

That is, until November, when inflation concerns really started rocking the market.

High growth, low-EBITDA companies like gambling sites tanked on the news — weighed down by a highly competitive niche that requires ungodly levels of marketing spend.

But now it’s Q3 2022 and while the crowd of sports-gambling companies has thinned a bit, most of the big players have managed to survive and thrive.

Which is why we’re taking the time to update our price target for our standout in the sports-betting space: DraftKings. 

The short of this is, DraftKings has managed to (mildly) curtail costs, while still growing its monthly userbase by 30% YoY.

Not only that, but DKNG is about to enter it’s (cyclically) highest revenue period of the year. With bear sentiment reigning supreme once again, Draft Kings is having it’s valuation unfairly compressed in a way that allows for new entrants to this long-term hold. 

There’s a little more nuance to that, so let’s discuss it more in-depth below 👇

DraftKings Overview:

We’ve been covering DraftKings for over a year now.

While our initial coverage got washed by the overall market turning bearish on expensive growth stocks, we’ve always seen DKNG as a multi-year play.

Since then, DrafKings has survived a highly competitive market while maintaining revenue growth. Q2 revenue nearly doubled while they managed to keep costs under control enough for their EBIDTA to move in a positive direction.

The main reason the market is still sour on DKNG is that while EBIDTA moved positively, it’s still -$800 Million for the quarter.

Which is, you guessed it, way too many losses for a broad sector of the market right now — hence DKNG’s stock price staying below $20 for the better part of this year.

However, when we look at these numbers, we still like what we see. Yes, DraftKings is still in a brutally competitive market with high marketing spend, but they’re choosing to grow in ways that set them up better in the longterm than a lot of their competitors.

So, let’s talk about that growth:

 

Better LTV, Better Growth:

The thing we like about DKNG compared to competitors like Fanduel is simple: They utilize their tech a little better and are focusing on long-term user growth.

Check out our last analysys about them here to see more about how they’re utilizing this tech to make their product as sticky as possible.

They make it really easy for their users to enter their app—and even easier to try out new products.

DKNG is all about simplicity, which accounts for a lot of their revenue growth in the past two quarters as they’ve gotten a lot of their users to try out betting on MLB games.

The big number is that they’ve managed to increase their Monthly Users 30% compared to Q2 2021. Which is WILD considering that we don’t really expect to see much growth in this industry until the very tail end of Q3 when the NFL season kicks off.

DraftKings plays like a way stickier product in an industry that has a very low LTV. Furthermore, we’re about to enter that period where revenue for all sports betting apps get flooded with revenue as NFL fantasy and the NFL season are set to kick off in September.

Even bigger than that, 35% of the potential population that COULD be in DraftKing’s TAM is now available to them in legal gambling states, with enough legislation currently on the table to make 45% available by next year.

It’s a sticky product that keeps finding new ways to grow revenue. That revenue is coming at really steep margins right now — but we’re confident with the risk that DKNG can use it’s high customer LTV and strong partnerships to survive and thrive all the way to the end of this bear period.

The stock can still potentially go down from here if this bear market extends further, but this is a strong entry point before the NFL season starts adding positive buy pressure to the industry again.

This stock is for the patient investor but we believe this could end up being one of the bigger winners in the tech space over the next few years!


Price Target: $26 (53% upside)

Current Price: $17

Target Date: Q2 2023

Rating: Overweight

Risk/Reward: High/ Very High

Ticker: DKNG

Market Cap: $7.68B

Dividend Yield: 0%

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