DraftKings (NASDAQ:DKNG) stock represents an exciting way to gain exposure to the new generation of sports and the igaming environment. Since going public, Draftkings has become the only vertically integrated U.S. pure play on igaming and sports betting.
Gambling tends to be cyclical. But unlike its competitors, Draftkings has taken advantage of technology that will make it prepared for multiple economic scenarios.
On its first quarterly earnings call, CEO Jason Robin stated he felt the industry for online sports fantasy and igame gambling could be $30 billion. He expressed confidence that their sports gambling revenue would return after Covid, but it has not stopped him from working around it.
Expanding The Audience
Recently, states have been more and more willing to open the door to Draftkings. Robin suggested budget deficits have been partly responsible for the loosening of regulations.
The legality of online gambling and sports betting varies from state to state right now, but the trend is definitely the friend of online gambling stocks. It will likely continue to spread.
CFO Jason Park stated on their earnings call that even with its most recent challenges Draftkings’ revenue was up 30%, and would have been up 60% if it were not for Covid-19. Monthly Unique players were 720,000, which is up 16% from 619,000 at the same time a year prior. The average revenue per monthly unique payer was $41, a year-over-year increase of 12%, over that same timeframe.
A key to their future success tends to be their cross-selling of games. It is working, but it will take time and resources.
State expansion drove the increase in revenue. Covid-19 affected March Madness basketball and the NBA and NHL seasons. Online gaming activity offset some of this weakness.
DraftKings Stock Is Managing What it Can Control
In the meantime, the most recent capital raise provides time for DraftKings stock to wait it out. It has about $450 million of cash on the balance sheet and no debt. It will burn between $15 million and 20 million a month. It also plans to move towards proprietary software, which will improve margins and make it a differentiator.
There are some unknowns related to how leagues will navigate the crises. Overlapping sports calendars may impact where DraftKings allocates marketing resources. There is no clear view of whether this will be a net positive.
Although Robbins would not comment on Draftking’s share of New Jersey’s igaming numbers, public data shows a doubling of growth.
Starting the NBA Season
There will be no 2020 revenue guidance due to Covid-19 until league decisions are made.
I spoke with Terrell Thomas, editor-in-chief and CEO of These Urban Times, who spoke to players in the NBA to learn about how they are handling the delayed start of the season.
Thomas said to the question around motivation to start the season, that “People have mixed feelings depending on who you ask. There are fans/players who want to see the game return and who also have fans/players who think sports returnings is a distraction to the racial issues at hand and Covid 19.”
“From the players and people, I have spoken with, there are so many unknowns that feelings are mixed. They understand the importance of the game returning, but they understand there is risk involved.”
The NBA is looking to do everything within their powers to make the “Orlando Bubble” as safe and clean as possible. From players not sharing basketballs […] to limited numbers of players/coaches in the gym at one time. As more information continues to form, I believe the league [will] create protocols to keep players and staff safe.”
Good Buy at the Right Price
During the last earnings call on May 15, Robins felt confident enough to say that 2021’s guidance would not be affected and had a conservative expectation that they would start around Christmas. At the time the stock was around and adjusted price of $29.23. Draftkings closed at $32.42 on Monday, about 11% higher.
Notwithstanding the recent news of insider selling, I believe Draftkings is positioned well to capitalize on gambling. It is in a unique position to have broadly diverse revenue sources compared to its traditional brick-and-mortar peers. However, by most traditional methods of comparison, DraftKings stock appears to be technically overvalued. I would wait for a decent pullback in the stock before buying. In the long run, professional sports gambling will be a meaningful contributor to the long-term trajectory of the stock. And with the leagues working aggressively to reopen, Draftkings can salvage the season.
“I do believe Covid 19 has changed the sports and sports gambling industry. As leagues look to move forward without fans, a new user experience will be created on how folks view and communicate during live games,” said Thomas. “Although we were without the NBA and other sports for over 3 months, once games begin (if they begin), I believe the gambling industry [have] a increase of users and bets being placed. Thin[g]s were already starting to change in the sports gambling community. I see that taking place rapidly if sports resume.”
As of the time this article was written, Emmanuel Henson did not own a position in Draftkings.