DraftKings' (DKNG +0.37%) share price has been on a growth trajectory. The coronavirus pandemic and the ensuing temporary pauses of major sports leagues did slow down this growth stock, but it eventually recovered and finished 2020 strong.
The company reported first-quarter earnings in May; they beat revenue estimates and raised expectations for the rest of 2021. In fact, DraftKings is growing faster than what its management expected. Fundamentally speaking, here are two reasons why DraftKings' growth is happening faster than expected.
DraftKings boasts a 5 million Daily Fantasy Sports player database. Image source: Getty Images.
Converting Daily Fantasy Sports players
Years before entering the Online Sportsbook (OSB) and iGaming market, DraftKings was operating a successful Daily Fantasy Sports (DFS) website. Over its nine years in business, its DFS segment has acquired 5 million paid users. That's a treasure trove of data it can use to potentially convert those players into active players in its OSB or iGaming services.
As you may already know, OSB and iGaming are legal in 15 states and six states, respectively. DraftKings offers its services in 12 and four of those states for OSB and iGaming, respectively. And with each new state becoming available for DraftKings to market, it is converting 60% of its DFS players within the first 12 to 18 months of launching its service. In short, DFS being live in 43 states highlights plenty of runway for growth as more states legalize OSB and iGaming.
For players, DraftKings offers a single account platform that allows players to transition between its three services seamlessly. Once a player deposits onto a DraftKings account, the player can wager on Daily Fantasy Sports, Online Sportsbook, or iGaming.
Incentivize new sign-ups
In addition to getting existing players to engage in its newer services, DraftKings is also incentivizing new sign-ups. One tool the company uses to acquire new players is a deposit bonus of up to $500 while signing up.
That said, to get a full $500 bonus, a player needs to deposit $2,500. In other words, it's a 20% deposit bonus. For example, if a player deposits $100, he will only get a $20 bonus. Even then, the money is not completely in the hands of the player. For instance, after depositing $100 and getting the $20 bonus, a player cannot withdraw $120 from their DraftKings account. The bonus needs to be earned by entering a minimum threshold of wagers, depending on the bonus amount.
In the past, DraftKings has been successful in getting into new markets before its competitors can. And, of course, if you are the only place in town, you don't need to spend as much to acquire new customers.
Finally, DraftKings is approaching a scale where it can benefit from advertising efficiencies nationally rather than on a state-by-state basis. And these efficiencies get better with each new state that it launches its services.
For investors, DraftKings' ability to cross sell and offer incentives to encourage new sign-ups should help maintain elevated growth for several more years as more states legalize sports wagering activities. The stock is not cheap, trading at 17 times forward sales, but it could be worth it for long-run investors looking for a high-risk stock with a high-return potential.
