There’s no question that sports betting and online gaming is going to be big. One of the major players, DraftKings (NASDAQ:DKNG), is what I consider to be a “high-conviction” long-term buy. However, for DKNG stock to deliver for shareholders over the long haul, it’s got to capture the bulk of U.S. market share.
I think it will.
My opinion aside, a fun exercise might be to come up with an over/under proposition for the market share DraftKings captures by the end of 2025.
It’s Got to Be at Least 50%
Don’t ask me why I came up with this percentage. I guess it’s the easiest place to start. Of course, Penn National Gaming (NASDAQ:PENN) and Barstool Sports will have a lot to say about that, along with a handful of other major players.
For now, however, let’s assume it can grab half the U.S. market share.
Loop Capital analyst Daniel Adam recently initiated coverage of DraftKings with a “buy” rating and a $100, 12-month target price. As for PENN, he also started coverage on it with a “hold” rating and a $69 target price. At current prices, that’s 107% upside for DraftKings and flat for Penn National.
Of course, Penn’s come a long way from its 52-week low of $3.75 in March. It’s bound to cool off. Not to mention, Dave Portnoy’s controversial manner could be Barstool Sports’ undoing. But I digress.
Adam estimates that the online sports betting and iGaming market is worth $30 billion in the U.S. That could grow as high as $40 billion if 75% of America gains access to legalized online sports betting.
“DraftKings is in 10 states, which is about 20% of the U.S. population. Adam said the company can ‘increase penetration in both existing and new markets’ and models DraftKings’ around 49% average market share in 2021,” Yahoo Finance contributor Chris Katje reported on Nov. 17.
“‘Bottom line: We believe DKNG will emerge the clear share leader in online gaming given its powerful brand, early mover advantage and digital-first DNA,’ [Adam] wrote in the note.”
Ok, so that potentially gets it to 49% market share.
Another Analyst Likes the Industry’s Prospects
Several media outlets reported on Piper Sandler’s Nov. 20 call on DKNG stock. Analyst Yung Kim initiated coverage with an overweight rating and a $58 target price (20% upside).
Barron’s reported on some of the analysts’ thoughts. For one, Kim believes that sports betting and online gaming could become a $40 billion industry in the future. Secondly, New Jersey generated $300 million in sports betting in fiscal 2019; 82% was online.
So, like Loop Capital’s analyst, Kim sees a massive business. If DraftKings’ were to garner a 50% market share, that’s $20 billion in annual revenue. At 41-times sales, we’re talking about a market capitalization of $820 billion. Cut that multiple in half, and we’re still talking about a $410 billion market cap. Even at just 10 times sales, it’s worth $200 billion, 10 times its current value.
As for New Jersey, assume that its online sports and gaming was $246 million in fiscal 2019 (82% of $300 million). New Jersey legalized sports betting in June 2019. The state legalized online gaming in 2013. So, worst-case scenario, the online gaming industry is still only seven years old in New Jersey, leaving lots of time for future growth.
New Jersey is only one state. According to Axios, 17 other states have legalized sports betting, along with Washington D.C. with another four with bills passed to approve, nine states with active bills yet to be passed, and 19 with either failed legislation or no bills in 2020.
Now, imagine if California were able to pass legislation to approve sports betting. That would open a floodgate of business for DraftKings.
I guess time will tell.
DKNG Stock and the Over/Under
According to some estimates, FanDuel, which is owned by Flutter Entertainment (OTCMKTS:PDYPY), controls 39% of the sports betting market while DraftKings is in second place with 27%.
Of course, that doesn’t take into account online gaming. When you include it, DraftKings’ market share goes up. At least that’s what the analysts are suggesting.
So, for now, I’m going to suggest the over/under for DraftKings’ market share by 2025 is 45%. And I believe the best bet is over that number.
DKNG stock is a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
