DraftKings — Is the strategy paying off?

November 12, 2021 1:55 PM
Updated: August 3, 2022 3:33 PM

DraftKings — Is the strategy paying off?

Shutterstock
  • Hannah Gannagé-Stewart

DraftKings’ (DKNG) shares rallied on Monday, November 8, after a dip at the end of the previous week. It seems that analysts still have faith in the daily fantasy sports (DFS) giant as it continues in its pursuit of U.S. igaming dominance.

Trading closed with shares up 2.66% to $44.78, having taken a tumble after the firm’s Q3 earnings call on November 5.

Bernie McTernan from Needham is reported to have increased estimates on the operator by nearly 20% for 2022 to $1.9bn. “We are encouraged with the share gains DKNG achieved in September, coinciding with the cut over to its own product tech stack allowing for greater product innovation. DKNG made it clear the approach to Entain was opportunistic, and they believe they can achieve their target market share and product roadmap through SBTech,” the update says.

Likewise, Jed Kelly from Oppenheimer increased its 2022 estimate by the same amount and Jefferies analyst David Katz, clearly taking Draft Kings CEO Jason Robins at his word after walking away from the Entain deal last month, said, “We expect the focus to return to execution and the growth trajectory in North America”.

The DFS giant reported a $25m loss for Q3, due to pay-outs on bets made on National Football League (NFL) games. The firm invested heavily in marketing in the run up to the NFL season, as predicted by several commentators, but did not anticipate so many wagers going bettors’ way.

The less than favourable NFL season forced the operator to issue reviewed guidance for the 2021 full year, narrowing it from its initial $1.21bn to $1.29bn to a range of $1.24bn to $1.28 bn.

Recent weeks have felt a little choppy for plucky DFS firm turned aspiring igaming powerhouse after its highly publicised talks to acquire Entain dissolved.

Speaking at the time, Robins said: “We are highly confident in our ability to maintain a leadership position and achieve our long-term growth plans in the rapidly growing North America market.”

DraftKings was established less than a decade ago, but has pursued a relentless growth strategy, always with its eye on the inevitable opening up of the U.S. market, which of course came in May 2018.

After PASPA’s long awaited repeal, the operator became the first legal mobile sports betting operator in New Jersey, before launching in quick succession in Pennsylvania, New York, West Virginia, Indiana, Illinois, Iowa, New Hampshire and Mississippi.

In April 2020, the operator went public via a reverse merger with a special-purpose acquisition company as well as betting and gaming technology provider SBTech, and in August it reached a deal to acquire Golden Nugget Online Gaming in an all-stock transaction worth $1.56bn.

It then entered talks with Entain (formerly GVC Holdings) in which it made an offer of $22.4bn for the similarly acquisitive and fast-paced European business. However, after a month of discussions, DraftKings walked away, failing to make a decisive offer.

It turns out that the publicity around the deal may have been somewhat premature. DraftKings CEO Jason Robins, perhaps a little naive to UK’s takeover rules, admitted during the Q3 earnings call last week that the prospective deal had leaked earlier than he’d expected.

“Pursuant to the UK takeover code, it had to be disclosed that we were in discussions even though the discussions were very early”, he said. Explaining why he walked away from the deal, he said value was a part of it, and to a smaller degree deal complexity, adding, “Although it was really more about our confidence in our current trajectory in the U.S. or desire to focus on the U.S., and ultimately the value that we felt we would be shedding by pursuing that asset”.

Could it be, though, that ultimately DraftKings has reached a point where there needs to be a greater return on current investment before pursuing more spending? The Q3 results revealed revenue growth, but also mounting losses.

While revenue rose by 60.2% year-on-year to $212.8m, it was still a decline from $297.6m in Q2 and $312.3m in Q1. Meanwhile, costs also rose significantly – up 57.8% to $759.3m.

These were a combination of increases in gaming taxes and payment processing fees, as well as mammoth sales and marketing costs of $303.7m, and an increase in the cost of technology.

The first-mover strategy has certainly been the most favoured for companies looking to make a real impact in the U.S., but is there a lesson in pragmatism lurking round the corner for DraftKings?