DraftKings (DKNG 1.38%) had a volatile 2020. When several major sports leagues canceled or postponed their seasons at the pandemic's onset, engagement on its platform sank heavily. Eventually, it rebounded as sporting events returned (albeit in a modified form) and the fantasy sports platform and sports betting operator got back to doing what it does best.
As much of the company's revenue relies on customers placing wagers on the outcome of a sporting event, the return of sports was vital. Weirdly, the increasing number of people staying at home to protect against the pandemic further helped DraftKings recover. With limited entertainment options, more consumers turned to wagering on sports to occupy their time.
Now states are easing business restrictions, making more outside entertainment options available to people. It will be interesting to see if DraftKings users have adapted their behavior permanently. When the company reports first-quarter results on Friday, May 7, you're going to want to know its monthly unique player (MUP) total.
Capturing new markets
DraftKings reported having about 1.5 million monthly unique players as of Dec. 31, 44% more than the same time last year. The company defines MUPs as the number of unique paid users per month who had a paid engagement -- in other words, customers who placed a real-money wager on its platform. The growth of its user base is crucial to its long-term success and is a key indicator of its brand popularity.
It's important to remember that the online sportsbook (OSB) is still in its infancy. The Professional and Amateur Sports Protection Act (PASPA) was repealed just three short years ago, which paved the way for states to legalize OSBs. Since then, 23 states (representing 41% of the U.S. population) have legalized sports betting in some form. Fifteen states have legalized online sports betting, and DraftKings offers its services in 12 of those states.
There is a long runway for growth in the category, and DraftKings is off to a good start. First, however, it must continue to invest in the infrastructure to build out its business as more states legalize OSBs. And it needs to spend on marketing and advertising to make people aware that it's available in their state. All this will be expensive, and that's why you'll want to look at the MUP figure to check progress in customer acquisition.
What this could mean for investors
Wall Street analysts expect the company to report revenue of $231.53 million and a loss per share of $0.41. If earnings turn out as forecast, the revenue figure will be 104% higher than the same quarter last year. Investors will have to take that figure with a grain of salt because the first quarter of last year was when the effects of canceled sports seasons started, leading to lower-than-usual revenue.
Still, the growth figure should be impressive. Undoubtedly, DraftKings has excellent prospects as more states legalize online sports betting and iGaming. Be aware though that those prospects may already priced into the stock. At a forward price-to-sales ratio of 21.7, the stock is not cheap. So if investors want to start a position in DraftKings, they should be aware it is a high-risk opportunity, with the potential for massive long-term success.