A more tight-fisted approach with players is paying off for DraftKings.
In an investor note released last night, Deutsche Bank analyst Carlo Santarelli cited higher hold percentages as the leading reason for his bullishness on DraftKings. Santarelli’s counterpart at J.P. Morgan, Joseph Greff, also weighed in with a positive take on DraftKings this morning for comparable reasons, raising his price target on the stock to $20 a share.
Noting that igaming-industry revenue metrics have “come in better than our forecasts” both for online sports betting (OSB) and online casino games, Santarelli wrote that he was raising his DraftKings prognostications for both this year and the next. He boosted his price target from $22 a share to $24.
DraftKings closed Thursday at $25.23 per share.
The Deutsche Bank boffin observed that DraftKings’s market share, after hovering in the 26%-28% range for several months, had recently moved up to 31 percent. He attributed this growth to the closing of the Golden Nugget Online purchase, as well as to higher-than-average market share in newly launched states (Massachusetts, Kansas, Ohio, and Maryland). Santarelli also cited higher hold percentages than those of DraftKings’ peers, along with cutbacks in promotional outlays, particularly in contrast to brick-and-mortar rivals.
“We view the consistency of DKNG’s OSB share favorably and believe, in the absence of a radical change within the industry from new competition, something we view as unlikely, DKNG is likely to maintain, or even potentially grow, share from current levels,” Santarelli elaborated.
The Golden Nugget takeover and its concomitant acquisition of market share were viewed as growing the database over the last four quarters, particularly with regard to igaming. As for the tighter hold, based on data from seven states, Santarelli concluded that it was 560 basis points, compared to an industry average of 330 basis points — a substantial difference.
“While DKNG’s hold improvement, the primary driver of its [year-over-year] market-share growth, has been strong, it is largely a result of the gross hold strength, rather than the relative promotional disciplines,” the analyst noted.
Santarelli said outcomes of games were only “a modest contributor” to the higher hold. Rather, wider “standard line” wagers were credited, as well as multi-leg parlays “with considerably higher implied theoretical holds.” Also, “Operators [are] getting more sophisticated with their ability to identify sharper customers and putting limits in place.”
Parlay handle, in particular, has risen from 19 percent of total handle to 24 percent, based on data from New Jersey, Illinois, and Colorado over a four-year period. As each leg of the parlay adds to the theoretical hold, parlay hold has swelled from 13% to 18.5% from 2019 to 2023. By comparison, aggregate industry hold has peaked at just over eight percent.
“Of course,” Santarelli added, “as the advertising of lotteryesque wagers becomes more prevalent, to the extent that is possible at this stage, parlay holds are also likely to move higher, as operators test just how much the consumer is willing to pay per hour of entertainment.
“While most cheer higher hold rates in general, we remind investors that hold rates are nothing more than a cost of entertainment,” Santarelli cautioned. “As hold rates go up, the cost of entertainment for the consumer increases and, like anything else, eventually there is a tipping point.
“While we do not believe that threshold has been reached and we don’t anticipate it will be reached anytime soon, given the experience of FanDuel relative to the broader market, there are historical anecdotes that speak to situations that seemingly imply, it does happen.”
To illustrate, the analyst pointed to the Las Vegas Strip and the inception of 6-5 blackjack and triple-zero roulette in the 2014-9 period. “While these changes are far more transparent to the customer than the muddied expected value of each piece of a multi-leg sports-betting parlay, the parallel is a good one, in our view,” he wrote.
These changes drove table-game-drop down nine percent, for an overall revenue gain of 6.9 percent, below the rate of inflation. And while Las Vegas visitation grew 3.4 percent, table wagers per visitor fell 12 percent.
Santarelli closed by focusing on mixed news out of the OSB sector. In Ohio, the state has doubled the tax rate to 20 percent of gross revenues, a move that the analyst deemed “somewhat eye opening,” coming within the first six months of sports wagering. This puts Ohio above Arizona, Maryland, Colorado, and Michigan in terms of taxation. “We believe these actions could potentially put investors on alert for what we expect will be a series of likely adjustments of tax rates higher, be it effective, as in the case of Ohio, or statutory, as was the case in Virginia and Colorado,” he added.
As for Florida, the Seminole Tribe’s compact with the state has been validated by a federal appeals court, although state-level litigation could still impinge. Santarelli feels that while it appears a plus for the Seminoles in terms of total addressable market, since tribal lands are now construed to extend into cyberspace, “it is unlikely to provide much in the way of opportunity for the commercial operators.”
