DraftKings (DKNG) is a mobile sports betting and daily fantasy sports app. Prior to sports betting being opened to state-by-state legalization in 2018 by the U.S. Supreme Court, Draftkings' product was daily fantasy sports games. This was a gray area in terms of betting, as daily fantasy sports are pay-to-play games that pay out prizes to winners, and highly addicting. Draftkings now runs a sportsbook with future and live betting odds.
Sports betting is currently legal in 14 states and D.C., representing ~25% of the U.S. population. Many states are expected to legalize it in 2021 or 2022 by either a referendum on the ballot or legislative action. Texas, New York, and California would be massive boons for the betting market, as those states contain the overwhelming majority of the outstanding U.S. population that does not yet have legalized sports betting.
Here are some numbers showing the state-by-state proliferation of sports betting. Please note, people not familiar with sports betting that $ wagered does not equal revenue -- money must be paid out to the winners. Book revenue is excess wagering not paid out to winners.
This all happened with a very weak sports calendar because of the pandemic. March Madness was canceled, MLB lost 60% of its season, and NHL and NBA saw long delays. With a full sports calendar in 2021, expect U.S. wagering to climb YOY even more.
Like most tech startups, Draftkings is running at a loss. This is largely due to their large marketing outlay. Their revenue is steadily increasing every quarter. They smashed Q4 earnings expectations and raised their 2021 outlook as a result:
The company raised its FY21 revenue guidance from a range of $750 million to $850 million to a range of $900 million to $1 billion, indicating year-on-year growth of between 40% to 55%. The revenue guidance is driven by the launch of online legal sports betting in the states of Michigan and Virginia and assumes that all professional and college sports events will take place as announced.
Draftkings has inked a new partnership with UFC, and struck a deal with DISH Network that will integrate Dratkings sportbook on DISH interfaces, allowing people to bet on events directly on their TVs while they watch. Draftkings maintains an exclusive partnership with MLB, and it's my opinion MLB may want to promote fan engagement with Draftkings as a way to recover lost revenue resulting from the pandemic (MLB was the only major sports league to lose a majority of its season last year). Draftkings also has partnerships with many teams in the NFL, NHL, and NBA, though these are often short-term partnerships and team-by-team, not league-wide.
DKNG started trading last April. Since then, the stock is up about 265%; it is up 42% YTD. The stock hit an intraday ATH of $74.38 last Monday, March 22, and closed the week at $63.60, about 14.5% off its ATH, as part of a larger swoon for tech stocks. The stock experienced choppy trading in 2020 but has been in a strong, 5-month uptrend that started at the beginning of November 2020. Localized volatility in DKNG seems to be part of the overall market anxiety that pounded tech this month. Still, it remains up 10% since that excellent Q4 ER before February 26 trading, and IMO presents a great buying opportunity in this zone.
Draftkings undoubtedly benefited from a pandemic-induced closure of in-person betting. Reopening plays that directly challenge Draftkings' market share are MGM, WYNN, and PENN. As casinos, table games, and sportsbooks reopen for in-person betting, that may sap gambling revenues away from mobile betting.
For Draftkings to continue growing at a pace that justifies its stock price, it will need to continue growing its user base. For that to happen, more states need to continue to legalize sports betting. While governments have rarely turned down opportunities to capture new tax revenue, some may still hesitate to do so on the backs of a vice like gambling. Like marijuana, gambling legalization seems to be gaining momentum. But a ballot measure that fails to pass, or a state legislature that fails to agree on legalized sports wagering (or how to allocate the revenues generated thereby) can slow Draftkings' continued growth.