Shares of online sportsbook operator DraftKings (NASDAQ:DKNG) are up roughly 22% after an upbeat third quarter. The company has benefited from the slow ramp-up of different sporting events in the third quarter. It has also raised its expectations with a substantial increase in demand for the coming year. Pent-up demand for sports and additional legalizations in different states across the U.S. remain key growth drivers. Hence, DKNG stock is in a fantastic position to reach new heights next year.
The election cycle proved to be a blessing in disguise for the sports-betting world. Three states, including Maryland, South Dakota, and Louisiana, legalized sports betting. Nebraska is also in the pipeline with its recent approval of gaming expansion. For DraftKings, its total addressable market continues to increase with additional legalizations. Its current reach only represents 14% of the U.S. population, while analysts believe that the number could shoot up to 35% by 2021. Hence, the bull-case continues to widen for DKNG stock with multiple growth catalysts ensuring its sustained success.
Stellar Third-Quarter Results
The resumption of the sports calendar allowed DraftKings to return to winning ways in the third quarter. Its results exceeded analyst expectations and were a significant improvement from the previous quarter. Revenue grew 42% year-over-year to $133 million. It beat analyst estimates by one million and significantly improved from the 10% year-over-year decline in the previous quarter.
Loss per share was at 57 cents compared to analyst estimates of 61 cents per share. On a sequential basis, its net loss increased by 3.6%. It continues to spend a massive amount on sales and marketing, which grew by a whopping 240% year-over-year. The company has spent a massive amount of money on partnerships with sporting greats such as Michael Jordan and sports media giants such as ESPN and Turner Sports.
DraftKing’s unique monthly users rose by 64% year-over-year to 1.02 million users. DraftKings CEO Jason Robins said that “The resumption of major sports such as the NBA, MLB and the NHL in the third quarter, as well as the start of the NFL season, generated tremendous customer engagement.”
DraftKings has raised its fiscal year 2020 guidance from $500 million-$540 million to now $540 million-$560 million. Additionally, the company also expects revenues in the range of $750 million to $850 million. However, margins remain an issue for the company, as it continues to be inefficient in managing its operational expenses.
Opening of New Territories
In the third quarter, DraftKings began its operations in West Virginia and Illinois. Illinois has been one of the fastest-growing centers for iGaming, as its total bets have exceeded the $300 million mark in record time. The current quarter will see Tennessee opening up for DraftKings. Additionally, the company is also working in Virginia and Michigan. With these additional legalizations, DraftKing’s total addressable market continues to rise consistently. Its coverage of the U.S. population is set to rise to 35% from 14% currently. Moreover, significant states such as California are still in the pipeline providing a fantastic growth opportunity.
It’s clear that as soon as a state legalizes sports betting, DraftKings can scale up operations swiftly. It is the #1 brand in the iGaming market, with multiple partnerships with notable sports personalities, media broadcasters, and sports teams. Hence, the company can capitalize quickly on the new market and generate handsome revenues in virtually no time.
Final Word on DKNG Stock
DraftKings has bounced back well from a relatively weak second quarter. With the resumption of the sports calendar, I expect quarterly revenues to increase by healthy margins. It should benefit heavily from additional legalizations, which will further increase its outreach across the U.S. However, it needs to think seriously about its profitability, which has been marred by its rising marketing expenditures. All in all, DKNG stock looks like a definite buy at this point.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article
