DraftKings Tumbles Despite Strong EBITDA, Addressable Market Forecasts

Posted on: March 3, 2022, 09:15h. 

Last updated on: March 3, 2022, 02:14h.

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

DraftKings (NASDAQ:DKNG) is being taken to the woodshed today, even after the gaming company’s  investor day revealed encouraging long-term earnings before interest, taxes, depreciation and amortization (EBITDA) and total addressable market forecasts.

DraftKings
A DraftKings poster hangs in New York, above. The company delivered an impressive long-term outlook, but its stock slumped. (Image: New York Times)

Shares of the online sportsbook operator are lower by 8.65 percent in midday trading even after the company delivered positive remarks about margins and new market entry. At maturity, DraftKings believes it can achieve margins of 56 percent, up from a 2021 estimate of 50 percent, as it adjusts its customer acquisition and market entry strategies.

We are effectively pulling forward marketing to invest more for a bigger business,” said Chief Financial Officer Jason Park at the investor presentation.

Additionally, the Boston-based company forecast long-term EBITDA of $2.1 billion when accounting for synergies that will be realized via the pending acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG).

Making the weakness in the stock all the more vexing, DraftKings said the total addressable market for North American iGaming and sports regulated is “larger than we thought,” with the operator boosting its forecast to $80 billion from $67 billion.

DraftKings Sees iGaming Being Much Larger Than Sports Betting

While sports wagering is currently live and legal in more states than are internet casinos, DraftKings sees the latter easily topping in the former in terms of the total addressable market.

Using New Jersey — the online casino and sports wagering mecca of the US — as the template, DraftKings says the total market for North American online sports betting (OSB) could reach $28 billion, while iGaming could ascend to $52 billion, or $48 billion on a relative GDP basis.

Those forecasts assume no revenue growth in New Jersey from 2021 through 2023 and note adjusted gross OSB revenue per adult of $7.27 in the state is far below estimates in other states, including Colorado, Illinois, Indiana, Michigan, Tennessee, and Virginia, among others.

In echoing sentiments from other gaming companies that the internet casino opportunity set is more lucrative than sports betting, using New Jersey as an extrapolation for iGaming likely leads to conservative estimates. DraftKings says that in the sixth full year of online casinos in that state, adjusted gross revenue per adult was $69.52, compared to $149.12 in neighboring Pennsylvania after that state’s second full year of iGaming.

Further using New Jersey as the model, DraftKings projects a total addressable market of $6 billion to $9 billion for internet casinos and sports wagering in Canada.

Market Share, Customer Retention Outlooks

With concerns about DraftKings’ time line to profitability running high in the investment community, the operator sought to allay some of that issue at its investor day, highlighting strong customer retention and market share projections.

In its third year of OSB, DraftKings’ customer retention is 96%, up from 83% in year one, and revenue from remaining players “more than makes up for the customer attrition,” said Park.

The company forecast long-term iGaming market share of 20% to 25%, and OSB share of 20% to 30%.