In recent years, DraftKings (DKNG) has positioned itself as the clear leader in the US digital gaming revolution, with its shares soaring more than 100% this year to a market cap of $35 billion. Despite some recent headwinds, the acceleration of sports betting legalization in the US makes me very optimistic about the company’s future prospects.
I’m encouraged to see DraftKings continue its exceptional momentum, with revenues exceeding $1 billion in the third quarter of 2024, a remarkable 39% increase from $790 million in the prior year. This percentage significantly exceeds competitors in the broader gaming industry, strongly reinforcing my bullish outlook.
Furthermore, the company has some impressively robust fundamentals, with $878 million in cash and a relatively modest debt level of $1.34 billion compared to its market cap. This provides sufficient resources for further expansion and support for any unseen challenges. A resilient balance sheet is one of the green flags I look for in a company looking to capitalize on new market opportunities, so I’m pretty confident this growth story can continue.
Looking ahead, DraftKings forecasts impressive growth over the coming year, with revenue expected to reach between $6.2 billion and $6.6 billion, representing 27-35% growth from the $4.9 billion midpoint in 2024.
The platform’s popularity continues to rise, with the number of Monthly Unique Payers (MUPs) increasing to 3.6 million, significantly more than last year’s 2.3 million. This 57% increase demonstrates an impressive ability to attract and retain customers. I value the first-mover advantage the company has in many states, where many customers are likely to remain loyal to the brand long after the competition has entered, especially where the experience is enjoyable, accessible and overwhelmingly positive.
Average revenue per monthly unique payer (ARPMUP) is clearly a critical indicator for management. This has now reached $103, demonstrating the company’s ability to effectively monetize its user base. Excluding recent acquisitions, ARPMUP increased 8% year-over-year to $122, demonstrating significant improvements in monetization of the core platform.
To me, the company’s interface and user experience are second to none. Recent recognition as the number one US mobile Sportsbook app highlights this, with the platform ranking first in key categories including user experience, betting interface and overall features.
Management has clearly prioritized and invested heavily in product enhancement for the most popular sports on the platform, particularly in the NBA betting markets, where it now develops and manages all player prop and derivatives markets in-house. This opens up opportunities for further analysis and greater flexibility for new product offerings.
The live betting experience has also seen significant improvements, with new features including real-time trending betting and new ‘micro-betting’ capabilities. Users now benefit from integrated real-time scores, statistics and enhanced live content, creating a more engaging and informed gambling experience. I suspect such investments could help make the company the obvious destination for sports fans in the future.
Wall Street’s enthusiasm reflects my own bullish view, with analysts generally expecting a strong buy consensus, based on 25 buy ratings and just 3 hold ratings. Furthermore, the average DKNG price target of $50.20 per share implies an upside of 15.3% from current levels.
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Additionally, several leading firms recently raised their price targets, with TD Cowen rising from $50 to $55 and Barclays from $45 to $50.
I’m obviously very bullish on this, but the share price has admittedly had some bumps in the road lately. Some recent NFL results have hurt revenue, with the last quarter seeing the most customer-friendly stretch in the company’s history. For this, companies often look at the Hold Percentage, which represents the percentage that the company expects to keep of the total amount wagered by gamblers.
The company’s own analysis of NFL Hold Percentages shows that these recent results are outliers compared to the typical performance of the past two years, indicating a return to normalized rates is likely in future periods. As a result, I tend to view these as statistical anomalies rather than structural issues within the company’s betting algorithms. Such an outcome could be seen as positive in the long term, with higher returns increasing enthusiasm for the platform, retaining customers and further expanding the market.
Another potential headwind to keep an eye on is the competitive landscape. As many would expect from such a potentially lucrative sector, established gaming companies and newcomers alike are trying to grab market share. As a result, DraftKings has experienced some increases in customer acquisition prices over the past year, possibly as the last wave of excitement and enthusiasm for sports betting fades.
However, this will likely be experienced by everyone involved in the sector. Fortunately for investors, I expect DraftKings’ technological edge, robust balance sheet and market leadership will position the company well to weather these challenges as these cycles inevitably continue.
From my perspective, DraftKings presents a very attractive opportunity. Clearly, the continued legalization of sports betting on a state-by-state basis provides a solid stream of growth opportunities. With management demonstrating strong execution capabilities and rapidly improving financials, DraftKings remains very well positioned for me to capitalize, especially as sports betting continues to gain acceptance.
The combination of first-mover advantage, robust user growth, and an engaging platform experience sets DraftKings apart from the competition. While some short-term volatility may persist, the company’s strong fundamentals in this market with huge potential suggest that this is certainly a market to watch in the coming years.
