DraftKings Stock (NASDAQ: DKNG)
Our View
DraftKings Stock (NASDAQ: DKNG) We believe DraftKings is a potential buy, with a one-year price target of $65, implying a 25% increase from current levels. The political landscape is favorable for sports betting, but DraftKings is currently not profitable due to excessive spending on advertising and marketing.
Background
DraftKings is an American-based company specializing in sports betting and fantasy sports. Customers can use DraftKings for mobile or online sports betting in ten states: Colorado, Illinois, Indiana, Michigan, Iowa, Tennessee, New Hampshire, New Jersey, Pennsylvania, Virginia, and West Virginia.
Furthermore, customers can use DraftKings in-person through their casino partners in 11 states: Colorado, Indiana, Illinois, Iowa, Michigan, Mississippi, New Hampshire, New Jersey, New York, Pennsylvania, and West Virginia.
Fantasy sports on DraftKings are permitted in all but seven states: Washington, Idaho, Montana, Hawaii, Nevada, Arizona, and Louisiana. Customers can participate in fantasy sports contests for 13 sports leagues: NFL, MLB, NBA, NHL, Golf, Men’s Soccer, Women’s Soccer, Tennis, CFL, NASCAR, MMA, eSports, and XFL.
DraftKings also has an online gambling component through their online casino that is available for play in New Jersey, Pennsylvania, West Virginia, and Michigan. These games are similar to what one can find at a Las Vegas casino such as slots, roulette, baccarat, blackjack, etc.
The Stock
Source: Yahoo Finance
DraftKings went public in April 2020 through a three-way merger with Bulgaria gaming company, SBTech and Diamond Eagle Acquisition Corp, a SPAC. Overall, its stock price has trended higher, although it has suffered two sizable pullbacks. The latest pullback seems to be technical, as it broke the short-term uptrend (shown in the purple line) that the stock developed since its public debut.
Source: Yahoo Finance
Stock Performance vs. S&P 500
Source: Yahoo Finance
Current price (as of Thu. July 1): 51.80
52-Wk Low-High Range: $27.54 – $74.38
Average Volume: 16,590,000
Market cap: $20.77B
Shares outstanding: 400.98M
Catalysts
1. Legalization of sports betting in various U.S. states and potentially nationwide
In 2018, the Supreme Court overturned the federal ban on sports wagering that was enacted in 1992 under the Professional and Amateur Sports Protection Act (PASPA). They ruled that individual states, not the federal government, had jurisdiction to determine whether or not sports betting should be allowed. This paved the way for some states to enact some sort of sports betting legalization, whether in-person, online and/or mobile.
The map below shows the states DraftKings is available for use. We believe that DraftKings will slowly start to live in other currently legalized states. Furthermore, New York has recently signed legislation allowing for online sports betting. We expect DraftKings to be a major provider of sports betting in the state, considering that they already run a del Lago Resort & Casino sportsbook in Waterloo, New York.
Source: DraftKings
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2. Canada recently legalized sports betting
Last week, the Canadian Senate passed Bill C-218, the Safe and Regulated Sports Betting Act, legalizing single-game betting in the country. It will have a similar structure to the United States. That is, it will be up to the individual provinces to determine whether sports betting is legal. Currently, parlay betting is the only form of sports betting that is legal in provinces but only C$500 million is wagered legally on Canadian sportsbooks. It is estimated that C$14 billion is wagered illegally in Canadian provinces through illegal bookmaking operations and offshore sportsbooks.
DraftKings is already available in Canada, albeit only fantasy sports are available on the Canadian app. Various gaming commissions in Canada expect sports betting to be available later this fall.
3. Strong relationships with sports leagues and other companies
Although DraftKings spends a lot of money on advertising and marketing, it is for the better. These relationships help them with customer acquisition and retention. They are the official fantasy partner of the NBA, MLB, NASCAR, PGA Tour, and UFC. Additionally, they are the official gaming operator for the MLB and NBA. In September 2020, DraftKings partnered with ESPN making them the exclusive provider of fantasy sports for the network. Earlier this year, DraftKings announced a partnership with Dish Network to provide the ultimate sportsbook and fantasy experience to the cable provider’s subscribers.
DraftKings also has partnerships with individual teams in several sports leagues. These include partnerships with five NFL teams, eight NBA teams, twenty-five MLB teams, seven NHL teams, and the NY Liberty of the WNBA.
Risks
1. Hindenburg Research claims
In mid-June, short-seller Hindenburg Research released a scathing report alleging that the DraftKings merger with SBtech brought along black market ties, money laundering, and organized crime. On the morning the report was released, DraftKings’ stock plunged over 11% during premarket trading before recovering most of its losses during the regular trading session.
Hindenburg announced that they have opened a short position against DraftKings’ stock. The Hindenburg report details a timeline of SBTech’s record going back to 2012 regarding their black market operations. They allege that half of SBTech’s revenue is derived in Asian markets, where sports gambling is illegal.
Although Hindenburg Research has a good track record in calling out fraudulent companies, they have not always been accurate. SBTech accounts for roughly 10% of DraftKings’ total revenue, so it won’t have much of an impact when forecasting DraftKings’ future. It is also important to point out that Hindenburg Research has an incentive to push these stock prices down.
However, Thomas Allen, a managing director of equity research who covers gaming and lodging at Morgan Stanley, reiterated his “overweight” rating and $58 price target on shares of DraftKings after Hindenburg’s report. It was lowered from his original $63 target not due to Hindenburg’s report, but due to the level of stock-based compensation and the growing number of shares outstanding.
2. Currently not profitable
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Currently, DraftKings is not a profitable company, as they have posted net losses that continue to get larger. The company is spending too much money on advertising and marketing. In 2020, DraftKings spent nearly $500 million on advertising and marketing, representing over 80% of their revenue. Most of their marketing costs are attributed to their efforts to receive approval to operate in newly legalized states. If and when the whole country legalized sports betting, then marketing expenses will drastically reduce, which will likely make this a profitable company.
Financials
Our model assumes that DraftKings will achieve profitability in 2025 or 2026. We believe that this will be the time that many, if not all U.S. states will have legalized sports betting. To achieve profitability, this requires that advertising and marketing costs will have dropped significantly by then.
DraftKings has shown good revenue growth. For the fiscal year 2020, the company reported 883,000 average monthly unique paying (MUP) customers, compared to 684,000 MUP customers in 2019 and 601,000 MUP customers in 2018. Similarly, the average revenue per MUP customer for FY 2020 is $51, compared to $39 in 2019 and $31 in 2018.
Last month, DraftKings reported Q1 2021 earnings. The company reported an EPS loss of 0.36 along with revenue of $312 million. Additionally, because sporting events are returning to “normal” seasons, the company increased guidance on the revenue line from the $900 million to $1 billion range they initially stated to $1.05 billion to $1.15 billion.
DraftKings Stock (NASDAQ: DKNG) Written by Jay Devon
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