DraftKings: Missed The Inflection Point Bottom (NASDAQ:DKNG)

Unfortunately, DraftKings (NASDAQ:DKNG) wasn’t on the watchlist last Spring when the stock traded below $15 with the company reporting large losses. The sports gaming company was maligned for those large ongoing losses, and the sudden shift to EBITDA profits places the stock in a different light by investors. My investment thesis is still Bullish on the stock due to the attractive valuation, though one might want to wait for a pullback to buy shares.

Profit Shift

DraftKings has an enormous opportunity ahead in sports gaming and the shift online from gambling directly at casinos. The company spent heavily to capture this market opportunity and the stock market eventually lost interest in the story due to the aggressive customer acquisition costs.

The company forecasts the TAM will surge to $30 billion in 2028 from only $20 billion in 2023. This amount only factors in the states with approved sports gambling and currently excludes markets like California and Texas and only includes 6 state markets currently with iGaming.

Remember, this above opportunity is only from existing states. DraftKings now forecasts a 2028 revenue target of $7.1 billion due to an existing 30% market share with an adjusted EBITDA target reaching $2.1 billion for 30% margins.

The stock once traded below $15 with a market cap below $10 billion despite these promising growth dynamics due to the mounting losses at the time. DraftKings only reported 2023 revenues of $3.7 billion with guidance for revenues to nearly double by 2028.

What really supercharges the stock is the sudden shift to profits this year. DraftKings is forecasting ~$1 billion in incremental revenue in 2024 will contribute $500 million in adjusted EBITDA. The end results is guidance for losses in 2023 turning into a solid EBITDA profit of $400 million in 2024.

The stock has a market cap of ~$18 billion now and investors can do the math on the appropriate market valuation based on these forecasted numbers. The key is that the story is still in the early innings.

The majority of the country still doesn’t have online sports gambling and key states don’t even allow sports gambling period. Texas has introduced OSB legislation, but the state along with California and Florida aren’t even on the radar yet.

DraftKings actually estimates up to $6.2 billion worth of future adjusted EBITDA with further OSB and iGaming legalization. A total of $4.8 billion is targeted for iGaming, but this view is very long term considering the limited progress so far.

New Jersey alone has reached $3 billion in GGR with iGaming revenues continuing to jump even 10 years after launch back in 2013. OSB is still a small fraction of GGR after a launch in 2018, but in total the market grew an impressive 25% in 2023 with no real slowdown after the Covid bump.

DraftKings only has 2.3 million MUPs (monthly unique payers) with average monthly revenue of $114 per payer. The sports gaming company generates a lot of business from what amounts to a very small paying customer base leading to the long-term opportunity discussed above to dramatically expand TAM from just the existing legalized states over time.

Still Cheap

The stock has already seen a dramatic rally in the last year, making an investment at this point difficult. DraftKings is still relatively cheap trading at ~8.5x the 2028 EBITDA targets without any additional states gaining legalization. Put another way, at 20x forward EBITDA, the stock would trade ~125% higher in 2027 using the existing 2028 targets.

Remember though, DraftKings has the potential for up to 300% upside in additional adjusted EBITDA from the legalization of other states, including California, Florida, Georgia and Texas. The timing of these other states approving sports gaming or iGaming is unknown, but the direction is clear towards approval when a state like Ohio is now generating nearly $200 million in annualized tax revenues from online sports betting.

The Ohio market is a prime example of how DraftKings and FanDuel dominate the market. The market just launched back on January 1, 2023, and BetMGM is a distant 3rd player in the market.

This market dynamic allows DraftKings to boost profits via spending less on promotions and customer acquisition costs. Back in Q3, revenues rose 57% to $790 million, but the company spent $8 million less on sales and marketing, providing the massive boost to adjusted EBITDA. A market like Ohio will see drastic improvements in profits going from year 1 to year 2.

Takeaway

The key investor takeaway is that DraftKings is tough to buy after the massive rally off the lows last year. The ideal scenario is to grab the sports gaming stock on a pullback, though one has to risk to missing out on further gains. The key is to own the stock before any of the large states approve sports gaming.