Investment Thesis

Because of its technology and product offerings, DraftKings, a well-known online gaming company in the US, has a strong brand advantage. Launching new products and leveraging customer data are made possible by the company's in-house technology platform, which was acquired in 2020. Because of its solid financial standing, DraftKings is able to devote more funds to building its brand. With FanDuel controlling the majority of revenue, the company has expanded its dominant daily fantasy sports position into one of the top spots in the North American sports betting and iGaming market. Despite regulatory changes like tax rate adjustments, postponing legalization, and restricting market access, DraftKings' financial situation is anticipated to improve. Market scale leaders like Flutter have maintained their strong revenue shares and profitability despite the developed gaming markets in the UK and Australia, giving DraftKings hope for success in the US over the coming ten years. Around 40 states currently allow sports betting and iGaming, and seven more will follow in the coming years as governments take advantage of the tax money brought in by the expanding industries. Early in the next decade, the North American sports betting and iGaming market is predicted to generate over $40 billion in revenue.

• Warning! GuruFocus has detected 4 Warning Signs with DKNG.

Notable Guru Holdings

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Steven Cohen (Trades, Portfolio) 14 DraftKings transactions (Point72 Asset Management _.png" data-href="" style=""/>

Investment Upsides

Due to its early mover advantage in daily fantasy sports, DraftKings, a well-known online sports and iGaming betting company, has significantly increased its market share. With more than 30% of the market, the company is the second-largest revenue sharer in the states where it competes. This job is ideal for getting sports betting licenses, particularly in states where only physical retail gaming operators are granted multiple licenses. There are 25 states where you can access DraftKings' online service. With DraftKings and FanDuel controlling roughly 20%25% of Michigan's iGaming market, DraftKings also enjoys a strong competitive position. The mid-single-digit percentages held by Caesars, BetRivers, and Golden Nugget (an online business owned by DraftKings) are dwarfed by these top three players. DraftKings is making wise investments in technology, assets, and products to guarantee that its brand's intangible asset edge lasts. One example of this is the 2020 acquisition of SB Technology, which gave the gaming operator an internal platform.

Because it gives businesses the ability to leverage customer data and introduce new product offerings, vertically integrated technology is crucial for bolstering competitive advantages in the market. In 2024, DraftKings' structural sports hold rate increased by 70 basis points to 10.5% thanks to its new parlay products and technological platform. Golden Nugget's casino customer database and online iGaming offering were acquired by DraftKings in 2022 following the SB Technology acquisition, which further reduced the cost of acquiring new customers. DraftKings' revenue per marketing dollar increased from $1.24 in 2020 to $3.77 in 2024, despite a decrease in marketing expenditures on unique users. In 2024, the company's adjusted EBITDA and free cash flow turned positive, and it has a net cash position with an unutilized $500 million credit facility. With its online sports betting revenue share staying in the high 20s and its 2024 adjusted EBITDA margin increasing to 3.8% from a loss of 4.1% in 2023, DraftKings' critical mass US digital revenue share is proving resilient in the face of competition. Other smaller digital scale competitors have folded because it is too difficult to replicate DraftKings' competitive advantage.

Unlike the US, Australia has a thriving sports betting market with many online operators, having legalized sports betting in 1983. Australia has more stringent gaming laws that forbid in-game online sports betting, physical casinos, and online gaming. Advertising bans during sports and between 5:00 am and 8:30 pm are in place since 2019, with politicians considering a full outright ban. It is forbidden to use credit cards for both online and offline gambling. Additionally, Australia raised its gaming tax from 15% to 20% in 20222023, with territories accounting for roughly 50% of the country's total population.Additionally, the tax rate in the Victoria region was raised from 10% to 15%. Notwithstanding these difficulties, Flutter's adjusted EBITDA margins in the Australian segment remained at 25% in 2023, and it is anticipated that they will eventually stabilize in the low-20s while retaining its dominant market share. DraftKings can sustain its brand advantage in the region despite possible US regulatory policies; adjusted EBITDA margins are predicted to increase from negative 4% in 2023 to 29% by 2034.

Intrinsic Valuation

DraftKings' stock is modestly undervalued with a target share price of $46.04. This is primarily driven by lower intermediate-term marketing expenses. This suggests that revenue, marketing expenditures, and product and technology costs will drive an enterprise value/adjusted EBITDA multiple of 26 times our 2025 estimate. Investors have a positive outlook for 2025 due to DraftKings' strong underlying momentum, even with lower estimates.In 2024, DraftKings saw a 40% increase in hold parlay activity during the Super Bowl and a record $436 million in wagers. In Q4 2024, the company's structural hold increased 80 basis points to 11.2% as a result of increased NFL parlay activity. DraftKings' customer base grew by 3.5 million in 2024, reaching 10.1 million. This indicates that DraftKings' marketing as a percentage of sales may approach 12% over the next ten years, highlighting the company's intangible asset advantage.

Because of its industry-leading risk management tools and product offerings that enable an improved user experience, DraftKings is viewed favorably over the long run. Even though the company's customer acquisition costs decreased by 26% in 2024, its average monthly user growth was 37%. Over the next ten years, revenue growth is anticipated to average 12%. Over the next ten years, marketing as a percentage of sales is anticipated to average 15%, with product and technology accounting for an average of 6% of sales from 2025 to 2034. It is anticipated that operating margins will increase from negative 21.5% in 2023 to 20.2% by 2029. During 20252034, capital expenditures are expected to average 3% of sales.

Investment Downsides

The US gaming industry is experiencing a cyclical downturn as a result of terrorism attacks, slower economic growth, and outbreaks like the coronavirus. In 2020, the pandemic caused a 31% drop in gaming revenue. Political factors could affect DraftKings' opportunity and inherent value by delaying or preventing the legalization of sports betting and iGaming wagers. In order to meet budgetary constraints, states may also raise taxes on internet gambling, which could lower gaming companies' earnings. Companies' revenue share and profitability can be affected by promotional activity. By incorporating in-house technology and purchasing customer data from Golden Nugget, DraftKings has strengthened its position. Competitors can, however, improve their media, data, and technology offerings. Risks to DraftKings' environment, society, and governance include gambling addiction, which may increase government regulations and impact demand. To avoid mistrust, customer data must be protected.

Portfolio Management

With a net cash position of $74 million in 2024, DraftKings has a medium level of operating leverage and revenue cyclicality. The total amount of debt held by the company is low, with an estimated 2025 adjustment of 1.3 times. The 2020 acquisition of SB Tech, the 2024 partnership with Barstool, and the 2024 acquisition of online lottery provider Jackpocket are all part of DraftKings' investment strategy. In 2023, DraftKings' gross gaming revenue increased by 53% as a result of the acquisition of Jackpocket, which had a customer database of 6 million users, 1.8 million of whom were paying customers. With Jackpocket's customer acquisition cost being 80% less than its current business, this acquisition and cross-sell opportunity gave DraftKings a new way to attract new clients. The distributions made to shareholders by DraftKings are reasonable, with an emphasis on reinvesting in the company to maintain its competitiveness. While share repurchases are anticipated to become a more significant component of capital allocation in the second half of this decade, dividends are not a top priority. It is prudent for repurchase activity to take place below the company's intrinsic value.