DraftKings Could Use Amazon, Netflix Playbook to Garner Dominant Market Share, Says Analyst

Posted on: September 24, 2020, 10:35h. 

Last updated on: September 24, 2020, 12:09h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings (NASDAQ:DKNG) could use templates set forth by other well-known growth companies in their early stages as it moves to garner top-two positioning in the burgeoning iGaming and sports betting markets, according to an analyst that initiated coverage of the stock today.

DraftKings Sportsbook
The DraftKings sportsbook at Resorts Casino in Atlantic City. An analyst sees the company generating $4.3 billion in revenue in 10 years. (Image: Press of Atlantic City)

Macquarie analyst Chad Beynon starts the sportsbook operator at “outperform,” with a price target of $65, implying upside of 30 percent from the Sept. 23 close. That’s one of the highest forecasts on the name on Wall Street.

On its way to generating earnings before interest, taxes, depreciation and amortization of $1.5 billion — ahead of the company’s estimate of $1.2 billion — in 2020 on revenue of $4.3 billion, Beynon sees DraftKings stealing a page from the playbooks of Amazon, Netflix, and Tesla, meaning forsaking near-term profitability (losing money to later generate cash) to drive top-line growth while establishing dominant market share.

We think DraftKings can sustainably maintain top two share given their marketing expertise, database, brand awareness, and leading technology, which would lead to the creation of a multibillion-dollar enterprise,” said the analyst in a note to clients.

Common concerns with young growth companies, regardless of industry, including how high spending rises in the name of generating revenue and what timelines to profitability look like. DraftKings isn’t immune to those Wall Street worries. But many analysts appear at peace with 2022 or 2023 being the period in which the company turns profitable.

Arms Race, Big Opportunity

The US sports betting market is still in its infancy. But it’s not uncommon for observers and the investment community to use terms such as “arms race,” meaning companies such as DraftKings, FanDuel, Penn National Gaming, and others are going to have to spend big to lure and retain customers.

The opportunity set is, perhaps, too compelling to pass up. Beynon says the US internet casinos and sports wagering markets will be worth a combined $33.7 billion in 2030, up from just $1.4 billion last year. If that estimate comes anywhere close to being accurate, it’d be well ahead of DraftKings’ projection of $18 billion.

Ten years is a long time, and for investors that don’t want to wait that long, there’s still potential opportunity with online sports betting (OSB) names. That’s because Beynon believes that by 2025, 96 percent of the US population will have access to legal OSB.

Currently, sports betting is live and legal in 18 states and Washington, DC. It’s legal, but not yet operational, in North Carolina, Tennessee, Virginia, and Washington State. Several others, including Louisiana, Maryland, and Ohio, could join the party in the coming months.

All About Demand

Integral to the thesis for any sports betting equity, DraftKings included, is that spending on new customers in new markets is met with demand.

Data confirm that demand is there. For example, sports wagering is soaring in Colorado, one of the newest entrants to the live and legal party, and a market in which DraftKings has a footprint.

Beynon says the operator has “successfully converted daily fantasy players into OSB players, and has acquired new customers through efficient marketing spend.”

He sees the company posting revenue of $535 million this year and topping $1 billion in 2022 before ascending to $4.3 billion in 2030.