For all the hype around NFTs and new technologies, the more ‘mundane’ consumer products like lottery could be the most plausible route to mass adoption for the likes of DraftKings, while analysts lay out a tough road ahead for Penn.
The $750m acquisition of the lottery courier specialist Jackpocket by DraftKings is the first major non-online sports betting or casino deal the number 2 digital sportsbook in the U.S. has carried out, and one of the questions it raises is whether it is able to bring the mass lottery market into the real money online gambling sphere.
Most industry observers seem to agree with the rationale for the deal; that it will enable DraftKings to reach parts of the U.S. consumer base that other online gambling verticals have not been able to, so far at least. In addition, lottery is the very definition of a mass market soft gambling product, where consumers stake small amounts in large volumes in the hope of a (very) big payout.
DraftKings’ base building
The deal also enables DraftKings to reach players in states where sports betting is still not regulated and build up a customer database for the day when that regulation does happen. Parallels with what the Boston-based group and FanDuel did with daily fantasy sports in 2014-15 are clear and their leading positions in OSB show that the strategy can bear fruit.
As the JMP team commented, the Jackpocket deal “pushes the (customer acquisition) funnel wider” and although “it does not capture opportunities around future legalization (sports/iGaming-iCasino) and product development”, the regulatory pressures are minimal.
In addition, with iLottery legislation moving at a glacial pace, that potential competitive threat to Jackpocket “does not pose a risk to the company for potentially decades”; and when it comes to revenues, the lottery messenger company will add an estimated $80m in EBITDA by 2026 with “minimal synergies”.
And with DraftKings “standing on the doorstep of massive FCF generation, investors should expect value-enhancing opportunities” such as M&A or share buybacks. “Given the potential, we are comfortable applying multiples closer to bellwether, digital winners” such as Uber or Netflix.
DraftKings “ran a similar model with Golden Nugget, whereby it acquired an attractive database/product, invested in the product, and leveraged scale, which is now seen as the most successful acquisition in U.S. online gaming, in our view,” added JMP.
Noting DraftKings’ 44% annual increase in revenues and “considerable OSB and iGaming market share” gains in Q4, Jefferies concurred with JMP and said the acquisition was “largely a customer acquisition vehicle, notably in states where DraftKings is not live”.
Caution rules
For the Deutsche Bank team, the deal is “not insignificant” and more of a “prudent” transaction as it provides DraftKings with “an incremental growth driver, an additional iCasino brand and a broader audience to whom (the company) can cross-sell its products”.
The question of course is how much cross-over from lottery to sports betting and gaming DraftKings is able to generate, while for Jackpocket, getting sign off on agreements with state lotteries is rarely the quickest of processes.
But as industry investor Chris Grove commented, Jackpocket has “taken great pains to work side-by-side with lottery commissions”. To that can be added DraftKings’ “substantial government relations chops, and you’ve got a nice sword and shield in place for Jackpocket’s courier business at the regulatory level. You also pave a path for competitors unless you wrangle exclusivity from a state, which is a high hurdle to clear”.
Still, there are no major time pressures, and if laying out $750m for an acquisition can be described as “prudent”, then DraftKings might have carried out a very astute transaction. More generally, it will also be interesting to see if DraftKings becomes an online destination akin to a mass digital outlet where consumers can bet on sports, buy lottery products, tickets to sporting events or even NFTs.
Flashbacks and a tough road ahead
Penn Entertainment’s Q4 losses linked to its launch of ESPN Bet must have caused flashbacks for iGaming executives casting their minds back to 2021-22, when the leading names in the sector were regularly posting $500m-$1bn losses per annum.
Penn recorded interactive EBITDA losses of $334m in Q4 and said the combined Q423 and FY24 losses would reach $700m-$750m. These figures are “considerably greater than the $200m-$400m previously articulated losses”, said the Deutsche Bank team, and “meaningfully higher than investor expectations”, even if Penn overall had spent less than the likes of DraftKings or Caesars did around 2021-22 when they were chasing market share.
But Deutsche Bank cut to the chase in its assessment of where Penn was likely to struggle as it hopes to breakeven and reach more than 10% market share by 2025. Noting that the likes of DraftKings or Fanduel “spent, and lost, considerably more in their formative/ramp years than” operators like Penn “who currently sit in the 3-6 market share positions”, the analysts said losses in the early days (c2021-22) for today’s market leaders “exceeded $1bn”.
“Despite the strong brand partnership Penn enjoys (with ESPN), the $700-750m losses Penn anticipates before breaking even, with aspirations to garner greater than 10% market share in the OSB segment, are not supported by historical experience,” added DB.
In other words, Penn would need to spend more, and by some margin, to reach its aim of double-digit market share, while the obvious inference is that even if Penn did spend a lot more, there are no guarantees that it would hit its market share goals.
ESPN Bet has enjoyed “a reasonably solid start” since its mid-November launch, but the road will “be long and bumpy, and without tangible evidence of success, or failure, over the near term”, added DB.
As a result, Penn “is likely to remain a trading stock, based more on sentiment and data points, many of which are uninformative, than actual progress or core business fundamentals”. Again, Penn might well surprise the markets in the next couple of years, but the road ahead looks tough.
