DraftKings Inc. (NASDAQ: $DKNG) is an online fantasy sports platform and betting company. Based in Boston, it is a major player in the US online gambling industry. It was established in 2012 as a daily fantasy sports platform. Since then, it has grown to offer online sports betting and casino gaming.
Through a technological first approach, viral branding success, and ease of access, it has great potential in the expanding US online sports betting industry. However, its recent earnings results show it is still not profitable enough as the top-line growth rate far outpaces key financial metrics, re-igniting the debate about its pricey valuation.
Revenue Misses Expectations, But Guidance Raised
In its fourth quarter 2023 earnings results released on February 16, 2024, DraftKings reported revenue of $1.23 billion, showing a growth of 43.9% year-over-year, below the analyst estimates of $1.24 billion. The company met expectations for earnings of $0.29 per share on a non-GAAP basis, far exceeding the analyst consensus of $0.18.
While the latest quarter’s sales were slightly below the estimated figure, DraftKings raised its guidance for full-year 2024 revenue to $4.78 billion at the midpoint. The fresh stance is 2.3% above Wall Street’s forecasts and hints at revenue outperformance by 30.3% compared to fiscal 2023.
Monthly Active Users Beat Forecasts
One key number for DraftKings is monthly unique payers (MUPs), which in Q4 came to 3.5 million, surpassing analyst expectations of 3.3 million and showing significant growth in the company’s user base. However, MUP’s average revenue per MUP of $116 did not meet the estimates of $124.
DraftKings’ gross margin declined to 41.8% from 43.2% in Q4 last year. The cash flow balance for the quarter was negative $9.33 million, a significant decrease from an excess cash flow of $135.2 million in Q3 2023.
“DraftKings ended 2023 with excellent performance across customer acquisition, retention, and engagement as well as structural sportsbook hold percentage despite the worst stretch of sport outcomes we have seen as a public company in the fourth quarter,” said Jason Robins, CEO and Co-Founder of DraftKings.
Entry Into New Markets
During Q423, DraftKings started mobile sportsbooks in Maine and Vermont, bringing the US states where they are available to 24. The company hopes to release its sports betting product in North Carolina on March 11, subject to necessary approvals.
This bottom-up approach has seen the company engage in a state-by-state expansion in the relatively new U.S online sports betting and iGaming market. Amid the shortfall of the last quarterly report, the company has been investing in capturing market share in new jurisdictions as more states legalize sports betting.
Stock Performance
Shares of DraftKings closed at $44.57 on February 16, 2024, up by 0.25% for the trading session but down almost 10% year-to-date. The stock soared in 2021 and early 2022 when sports betting became legalized in some states, but then it had a sharp downturn from all-time highs of $74.38 in March 2021.
Following the Q4 earnings release after market close on February 16, 2024, DraftKings stock dropped over 3% immediately in initial after-hours trading. The sell-off signaled investors were dissatisfied with the relatively light earnings despite MUP growth and improved guidance.
Valuation and Growth Outlook
Currently, DraftKings has a market capitalization of around $20.46 billion. Wall Street analysts project sales growth of 27.7% over the next 12 months, reflecting an expected deceleration from the rapid 68.4% expansion achieved in fiscal year 2023.
DraftKings has firmly established itself as a top-tier player in the U.S. online betting platform, competing alongside Flutter Entertainment’s FanDuel and European rivals like BetMGM. The market opportunity remains massive, as legal sports gambling represents just a fraction of the total sports betting industry.
With U.S. sports betting adoption in its early days, if DraftKings can reignite user growth and expand into newly regulated states, the long-term upside likely remains substantial. However, near-term financial results may prove volatile amid a challenging economy.
Should You Buy DraftKings Stock?
Despite slowing growth and a light earnings report, patient investors could still be rewarded by buying DraftKings stock at current levels. The company dominates a U.S. online gambling market that is still in its infancy and has a long runway for expansion as more states legalize sports betting. While competition is heating up, DraftKings has an early lead with its brand recognition, product breadth, and nationwide footprint.
Its latest quarter showed strong user growth even with profitability challenges in the near term due to aggressive investing and one-time hits. For investors with a multi-year horizon who believe in the long-term shift to online wagering, recent pullbacks present a potential buying opportunity for this leading online betting platform. However, they should expect volatility in the short term due to financial results.
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