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Should You Buy DraftKings Stock After It Crushed Revenue Estimates?

By Parkev Tatevosian - Updated Jun 9, 2021 at 11:20AM

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The online sportsbook and daily fantasy sports company is gaining momentum as more states legalize sports betting.

Editor's note: This article has been edited to note that the company beat revenue estimates, not earnings estimates. 

DraftKings (DKNG -7.35%) recently reported first-quarter revenue that crushed estimates. The daily fantasy sports and online sportsbook company benefited from a robust sports schedule and some consumers having extra cash after stimulus checks hit bank accounts in March and April. 

Additionally, DraftKings' services became available in more states as its expansion across the U.S. continues. The results were so good, in fact, that management raised revenue expectations for the rest of 2021. 

Crushing revenue expectations

Analysts on Wall Street were expecting DraftKings to report revenue of $231.5 million in the first quarter. Instead, DraftKings blew past those expectations and reported revenue of $312 million. It's not often that a company so handily beats revenue estimates. The figure was 34.7% better than analyst estimates and represented 175% growth year over year.

Three adult males drinking bear and apparently watching sports.

DraftKings crushes earnings estimates and raises 2021 guidance. Image source: Getty Images.

It's no wonder, therefore, that DraftKings raised expectations for the rest of 2021. The company is now guiding investors to look for revenue in the range of $1.1 billion at the midpoint. That's up 16% from the previous guidance of $950 million at the midpoint. Known affectionately on Wall Street as a beat and raise, it's one of the best kinds of quarters a company can produce, where it beats current quarter estimates and raises expectations for the full year.

The outlook 

When the Professional and Amateur Sports Protection Act (PASPA) was repealed three years ago, it paved the way for states to legalize online sportsbooks (OSBs). Since then, 23 states have legalized sports betting, and 15 states allow sports betting online. After recently launching its services in Michigan and Virginia, DraftKings is now available in 12 states.

The OSB market is in its infancy. There is a strong tailwind behind the industry as states see it as an opportunity to increase tax revenue and reduce illegal sports betting. In 2021, 25 state legislatures have introduced legislation to legalize online sports betting. Admittedly, not all of those proposals will make it to the finish line. Still, it's hard to imagine states balking at the opportunity to bring in more tax revenue.

One of the states that introduced legislation this year is New York. With a population of over 19 million, it would represent DraftKings' biggest market if it can gain entry.

A group of friends drinking beer cheering in a home. One of them is holding a basketball.

DraftKings reaches 1.5 million monthly average unique players. Image source: Getty Images.

DraftKings is growing its user base fast. In the most recent quarter, it reported 1.5 million average monthly unique players. That was more than double the 720 million it had in the same quarter last year.  

As the wave of legalization of OSB continues in the U.S., DraftKings could continue adding players along with the market. DraftKings is also generating more money per user. In the most recent quarter, the average revenue per monthly active user increased to $61 from $41 year over year. Generally, it takes some time for a new player to get comfortable on a new betting platform, to learn the various betting options, the odds, the spreads, etc.

The twin pillars of new players plus increasing engagement per player could fuel growth for DraftKings for several more years. 

Should you buy DraftKings stock? 

DraftKings is trading at a forward price to sales ratio of 16.45, so the stock is not cheap. It also comes with its fair share of risk. Although the momentum appears in favor of increasing sports betting legalization, there is no guarantee that it will come to fruition. 

That being said, the reward is big enough for investors to make a bet on DraftKings. 

 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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