Online sports betting and igaming provider DraftKings purchased third-party lottery vendor Jackpocket last week for $175 million. The acquisition was announced after the February 15 market close, but before DraftKings’s subsequent fourth-quarter earnings call with stock analysts.
Wall Street seemed pleased with the move. Deutsche Bank analyst Carlo Santarelli wrote, “While the purchase price is not insignificant, given the current equity valuation of DKNG, we believe the deal is prudent.”
The analyst felt that way due to three factors: the provision of DraftKings with a subsidiary whose revenue growth is on an upward trajectory; another icasino brand (DraftKings owns Golden Nugget Online as well); and a larger lottery-oriented audience “to whom DKNG can cross-sell its products.”
Santarelli did allow, in a preview of DraftKings’s earnings call, that “bears are likely to remain quiet, while questioning the need to spend $750 mm on a lottery-style business while the core is in the process of ramping from negative EBITDA into the billions.”
J.P. Morgan analyst Joseph Greff forecast revenue for DraftKings for 2024 of $4.8 billion, plus what Jackpocket might contribute. (He didn’t speculate on the amount of added value Jackpocket might bring.) On its earnings call, DraftKings management estimated the U.S. lottery market at $100 billion per year and cited Jackpocket’s as the leading application in that space. Executives for DraftKings pegged Jackpocket’s revenue growth rate at 70 percent this year, 15 times the industry average.
According to Greff, Jackpocket currently possesses a database of six million customers, with 1.8 million active ones and 700,000 unique users per month. He added that DraftKings sees long-term value (LTV) in the deal, both from cross-selling and “an enhanced customer-acquisition engine.”
One reason for this is that, in the course of its due diligence, DraftKings found “significant” customer overlap between Jackpocket and itself, “with overlapping customers having 50%+ higher LTV profiles.” DraftKings estimated it would receive a revenue boost of $260 million to $340 million by 2026, along with $60 million to $100 million in additional cash flow. Those numbers are projected to swell to $350 million to $450 million in revenue by 2028, with cash flow enhanced by $100 million to $150 million.
Truist Securities analyst Barry Jonas expressed qualms, writing that it was unclear “if/to what extent and investment phase will be needed” prior to 2026. He projected five percent year-over-year revenue growth for Jackpocket through 2028.
Jonas harkened back to a 2021 discussion of ilotteries. “We see the primary [long-term] question of the business model as sustainability if more states adopt ilottery (which covers the sale of draw-based games). New state legalizations, however, have been slow to materialize and Jackpocket has actively worked to address this risk (inc. expanding beyond ilottery).”
The Jackpocket acquisition is being financed with a combination of 55 percent ($413 million) in cash and 45 percent DKNG shares (a $337.5 million value). DraftKings has nearly $1.3 billion cash on hand.
Jackpocket’s business model entails consumers purchasing lottery tickets online, with an emphasis on wide-scale drawings like Powerball and MegaMillions, in return for a courier fee of seven to 10 percent. It currently enjoys exposure to 35 percent of the U.S. population, according to Santarelli, in 18 states and territories. Jackpocket users can leverage the company’s presence to buy lottery tickets in multiple states.
“This transaction will create significant value for DraftKings, not only by giving our customers another differentiated product to enjoy,” stated DraftKings CEO Jason Robins, “but also by improving our overall marketing efficiency, similar to how our daily fantasy sports database created an advantage for DraftKings in OSB and igaming.”
Added Jackpocket CEO Peter Sullivan, “DraftKings’s broad footprint and mobile products present an opportunity to meaningfully expand the digital-lottery vertical.”
