DraftKings (DKNG) – Earnings Review – February 17, 2024
DraftKings is the largest player in online sports gambling and has a growing online casino presence as well.
Demand
Draftkings missed revenue estimate by 0.8% & missed its guidance by 2.4%. Its 56.3% 3-year CAGR compares to 81.2% as of last quarter and 131% 2 quarters ago.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profitability
- Missed EBITDA estimate by 15%.
- Sharply missed GAAP EBIT estimate.
- Missed 48% GAAP GPM estimate by 630 bps.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $1.3B in cash & equivalents.
- $1.3B in convertible notes. No traditional debt.
- Share count (basic and diluted) rose by 6.0% Y/Y in 2023. This needs to slow.
2024 Guidance & Valuation
While the quarter wasn’t great, the 2024 guidance was. It raised its original revenue guide by 2.7%, which is 2.3% ahead of expectations. It also raised its original EBITDA guide by 15%, which beat estimates by 6%. More parley options and flexibility are leading to an expectation of rising hold rates (basically a take rate), which resulted in $35 million and $25 million of the revenue and EBITDA raises, respectively. Stronger engagement, risk management and retention contributed to the rest of the raise. Sales and marketing will fall Y/Y, stock comp will fall from 11% of sales to 8% of sales and it expects to generate $360 million in FCF.
It also reiterated 2028 targets calling for $7.1 billion in revenue and $2.1 billion in EBITDA just from existing states.
“Superior LTV and CAC is the ultimate competitive advantage, and we have initiatives planned to enhance both in 2024 and beyond.” – CFO Jason Park
Based on the 2024 guidance and estimates, DraftKings trades for 46x 2024 EBITDA. EBITDA is expected to sharply and positively inflect. It is not expected to turn GAAP EBIT positive until 2025 and trades for 62x 2025 expected GAAP EBIT.
Call & Release Highlights
An Emerging Leader:
DraftKings total sales and marketing expense rose by just 1% Y/Y for 2023. It cut back greatly on spend in 2023 to trim its cost base bloat, yet saw no impact on demand. It credits this to the heightened sense of urgency tied to each dollar of investment leading to better capital allocation.
There are no apparent switching costs between one sportsbook vs. another and this is arguably a commodity. Yes, different books can create a slicker interface and offer unique parleys, but the bulk of the product offering is identical across vendors. For this reason, it continues to amaze me that its market share gains remain so steadily strong. Specifically, CAC fell by 27% Y/Y in 2023 after falling by 21% Y/Y in 2022 while its retention rate is at 90%, which is far higher than I would expect. Marketing spend is declining in older states; newer states are reaching profits more quickly; its increasingly national footprint is allowing it to shift regional marketing activity to more efficient national channels. It remains the top player in online sports and casino betting for another quarter. CEO Jason Robins called 2023 the “year of prove it” 12 months ago. They’re proving it.
OSB = Online Sports Betting; from the shareholder letter
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Where Draftkings can separate from other products, it does. It’s the clear leader in parley (multiple combined bets) structure innovation, which again is boosting its take rate.
Juxtaposing the Q4 Results and the 2024 Guide:
One may wonder how the Q4 results were materially weak, yet the team has confidence in raising its 2024 outlook. Good question; I had the same one, and the explanation actually makes sense. Historically customer-friendly event outcomes (gamblers won a lot of money) hit EBITDA by $126 million and revenue by $175 million, respectively. It would have crushed expectations without this abnormality which reverted back to typical trends in December. Revenue per payer growth of 6% Y/Y would have also been 22% Y/Y without this hit. Based on all of this and the market share commentary above, weakness is not at all related to competition or new entrants like ESPN Bet.
Growing Footprint:
DraftKings is in 24 states for sports gambling and 5 states for iGaming. There are 7 states that recently introduced legislation to legalize sports gambling or put legalization to a referendum vote. 5 states are working on iGaming reform.
Jackpocket Acquisition:
DraftKings will acquire Jackpocket for $750 million. 55% of the purchase will be funded via cash on its balance sheet with the other 45% funded via stock. Online lottery revenue is expected to compound at a 5% clip through 2028 and this is the #1 app in the category. It’s expecting to grow sales by 70% Y/Y to reach $135 million in 2024. This is not in the company’s 2024 guidance as the purchase has not yet closed.
Jackpocket brings another means of cross-selling customers to enhance retention and LTV. It also has an 80% lower CAC than DraftKings on average and boasts 50% customer overlap with it too. The opportunity for cross-selling and improving revenue quality is compelling. It has 700,000 monthly payers across its footprint, which only spans 1/3 of the states where this is legal. It also has a homegrown app and backend.
Take
Some will pick on the Q4 misses as a reason to be negative. The misses were well explained and did not bother me at all. The 2024 guidance raise is really what investors should be focusing on in my non-shareholder opinion.
This company continues to impress me. It reminds me of Uber a few years ago with margins exploding higher and trending better than anyone thought they could. There’s much more competition here than Uber faces, but there are similarities. A pristine brand may be blossoming before our eyes in this large and growing market. I’ve added Draftkings to my watchlist and will follow it more closely going forward.
