DraftKings ($DKNG) — Flutter — August 13, 2024
FanDuel owner Flutter announced earnings today. In that release, they told investors that they would not be implementing the same high tax state surcharge that DraftKings announced this month. Immediately following the news, DraftKings announced that it will no longer be moving forward with the surcharge either.
There’s a reason why DraftKings decided to wait until January 1st to implement the surcharge in the first place. There’s also a reason why it explicitly said it’s open to changing its mind here if better ideas or other news surfaced. DKNG was not married to this surcharge, and was always going to pivot if it thought that became preferred.
This is good news for DraftKings. It gives it immediate clarity on where the other piece of this duopoly stands on the matter. It’s better to be the party reacting in this situation than the one leading. Now, DraftKings has the luxury to shift from leader to reactor. I would not be surprised if it pitched this idea just to get FanDuel to talk more about their plans so DKNG leadership had time to match up strategies before 2025. That’s anti-competitive, but still could have easily happened.
The news removes the market share risk for DKNG. At the same time, this also removes some upside to 2025 EBITDA targets that management saw as possible. DKNG’s $950 million EBITDA target did not rely at all on the surcharge, but potential for excess profitability has diminished somewhat. I think the key word here is somewhat, considering Flutter leadership did subtly reveal how they plan to combat rising taxes. FanDuel will pull back on marketing and promotional spend.
And now that DKNG can copy rather than lead, it has choices in how to combat higher taxes. It can choose to maintain its own spending levels in high tax states and likely pick up low margin market share. It can also decide to mimmic FanDuel’s cost cutting to bring back some of the 2025 EBITDA upside stemming from higher tax responses.
At the end of the day, the situation is highly fluid and the game theory will continue to unfold between these two market share kings. FanDuel will not let DraftKings steal all of their market share and vice versa. Both will bob and weave until the players arrive at the most efficient outcome under this new tax regime.
