Writing to investors this morning, J.P. Morgan analyst Joseph Greff pronounced himself “incrementally impressed” with the recent performance of DraftKings, trading at $40.30 per share. His verdict was an offshoot of a meeting with DraftKings CEO Jason Robins and three other company executives.
As causes for optimism, Greff cited improved hold and “underappreciated” opportunities in the internet-casino sphere. He also was pleased with DraftKings’s burgeoning amount of cash on hand, which he said could be applied toward stock buybacks or accretive acquisitions.
The analyst wrote that “continuous product iteration and technology competencies are driving higher structural hold rates, benefiting from increased adoption of its higher-margin parlay products and other diversified bet types that are unlocking increased engagement and monetization of its customer base.”
As an example, Greff cited the recent Super Bowl, in which the absence of touchdowns from Travis Kelce and Isaiah Pacheco meant good hold on parlay bets. Also, the overall Super Bowl hold rate met expectations, despite the betting public taking heavy action on the underdog Kansas City Chiefs.
On an adverse note, Illinois Gov. J.B. Pritzker recently proposed exponentially hiking the state’s tax on sports-betting-derived revenue, from 15 percent to 35 percent. To its evident relief, DraftKings’s team noted that legislators’ opposition has been “tremendous.”
Robins and fellow execs also outlined a possible road to compromise, whereby igaming is legalized in Illinois in lieu of a tax increase: “a way to accomplish the governor’s budget goals without impacting the consumer value proposition.” Greff added that Illinois has been on the list as one of the next dominos to fall in the growing legislative approval of igaming.
Despite relatively limited penetration of igaming in other states and a still-evolving icasino product, the DraftKings braintrust noted that internet-casino revenue has been growing consistently. State budgetary problems may create opportunities for expansion in the near future, particularly in New York, as well as in New England and the Midwest.
DraftKings described its recently announced Jackpocket acquisition as a means of obtaining prospective igaming customers “and cross-sell them across the ecosystem.” The executive outlined a scenario whereby Jackpocket’s “regulatory-friendly technology framework” facilitates the spread of DraftKings’s igaming products “to a meaningful portion of the U.S. market, allowing [DraftKings] to build its database.”
This would possibly extend even into Texas, one of Jackpocket’s largest constituencies. Initially, Jackpocket will operate as a stand-alone venture, “eventually” integrated with DraftKings’ sports betting and igaming offerings.
In spite of recent media focus on in-gaming betting, Robins’s team was of the view that it was still an “underpenetrated opportunity.” Although proposition bets mean lower yield, DraftKings was of the opinion that they represent an opportunity to increase both monetization of its product and public engagement. “On its progressive parlay product,” Greff added, DraftKings “is seeing encouraging early results, although the product is not yet rolled out for every major sport.”
The executive team sounded unfazed by illegal and offshore betting, though they acknowledged that it was still substantial. Instead, they saw in it “a longer-term growth opportunity for the regulated industry and should incentivize regulated operator-friendly tax rates to present a strong value proposition and bring previous off-shore consumers into the regulated market.”
Newly legalized Brazil wasn’t mentioned as a potential expansion market, but Robins and his cohort said that they were looking at overseas opportunities, preferably in areas with high ceilings for growth — i.e., not western Europe.
Robins also touched on the new DraftKings alliance with controversial Barstool Sports, recently jettisoned by Penn Entertainment in favor of ESPN. The company expects the return on investment from the Barstool pact to be “solid,” with the association lending DraftKings an even higher profile.
