DraftKings ($DKNG) – New Position & M&A – May 25, 2024
New Position Intro
It’s no secret: I’ve been deeply impressed by the last several $DKNG quarters. Consolidation has begun to pick up with players like Sports Illustrated shutting down; a two-headed monster in DraftKings and FanDuel seems to be emerging.
DraftKings has demonstrated a keen ability to consistently cut marketing spend while growing market share. That shows me their claims about subtle product differentiation and brand quality are likely accurate. It has mastered the state launch playbook, with new states turning EBITDA positive almost immediately. Even in its most mature states, the runway remains long and the black market conversion opportunity remains large. Just this past week, DraftKings reported a new record hold (take) rate and revenue period in New York. Continued hold rate gains are expected to continue as DraftKings rolls out more parley options.
Its current profit explosion is a result of the delightfully surprising customer stickiness. It will go from roughly GAAP EBIT break-even this year, to $450 million next year (44x EV/EBIT) and $950 million (21x EV/EBIT) the year after, based on current estimates. Non-GAAP EPS is set to compound at a triple digit clip for the next two years, with it trading for likely 80x-85x 2024 earnings, 25x-30x next year and a current PEG ratio of under 1x. Estimate trends are firmly positive.
As an aside, the decision between this one and Flutter (owns FanDuel) was a tough one. I prefer the pure-play, digital U.S. gaming footprint over more of an omni-channel, global footprint. But it was a close call. I did not seriously consider any other players in the space.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Next month, I will publish an investment case article that dives far more deeply into the company, why I think the big boys (in a seemingly moat-less sector) are finding rapid leverage and the real risks that coincide with this stock (mainly regulatory). That should be sent in mid-June after the Nu investment case article is published. Stay tuned.
M&A
DraftKings closed its acquisition of the mobile lottery company Jackpocket. Jackpocket is an app-based facilitator of ticket purchasing from entrenched lottery companies. One of the best ways to drive retention and lifetime value in a highly competitive space is via cross-selling. Ask Uber, Spotify or Amazon. It means lower marketing intensity and higher-quality revenue. Jackpocket represents a third product category retention arrow in DKNG’s quiver. The main cross-sell opportunity here will be more states legalizing iCasino, but its proposed Jackpocket acquisition provides another outlet in the lottery market. It will also be able to market its current offering to that firm’s 700,000+ users (with a bit of customer overlap, I’m sure).
