DraftKings (DKNG -4.26%) offers mobile sports betting, daily fantasy sports, and iGaming. The company is a Cathie Wood favorite and among the top 25 holdings in her Ark Innovation ETF portfolio.
DraftKings is having an excellent year for revenue growth. Its first-quarter 2021 results were so good it had to raise estimates for the rest of the year. Then the second quarter made those estimates look conservative, so it had to increase revenue targets again. Even after all that, the company is likely to beat the twice-raised target, and here's why.
Millions of new potential customers
Before I get into why it is likely to generate revenue above the target, let's recall what management said about the revenue target for 2021:
On our first-quarter earnings call in May, we increased our 2021 revenue guidance to $1.05 billion to $1.15 billion from $900 million to $1 billion. Given our continued strong performance in 2021, and underlying acquisition, retention, and monetization of players, we are increasing our guidance to $1.21 billion to $1.29 billion of revenue for 2021, which equates to year-over-year growth of 88% to 100% ... We also assume that all professional and college sports calendars that have been announced come to fruition and that we continue to operate in states in which we are live today.
The crucial part of CFO Jason Park's statement is that the revenue guidance assumes DraftKings continues to operate only in the 12 states open as of the second-quarter conference call. However, that is not going to be the case. Since the call, the company added Arizona and Wyoming to the 12 states of operation.
Typically, when DraftKings enters a new state, it starts with a robust marketing campaign in a bid to acquire customers. Moreover, the new states are coming online right around the start of the National Football League season, which generates the highest engagement from DraftKings customers. The timing could not be better.
Interestingly, Arizona has the 16th largest population in the U.S., with 6.4 million people, and Wyoming is the least populated state with 563,000 people. Based on those figures, the launch in Arizona is likely to have a more meaningful impact. Before the launch of the mobile sportsbook, DraftKings launched its daily fantasy sports product in Arizona, which experienced over 90,000 contest entries in the first 12 days. To put those figures into context, DraftKings had 1.1 million monthly unique players at the end of Q2.
Nevertheless, opening its services to 7 million potential customers will likely boost revenue over what the company estimated for the year.
What this could mean for investors
Regulatory challenges are the most significant risks facing DraftKings stock. It is not sure to get approval to operate in the additional markets it would like to. Thus far, the momentum is going in its favor, and it is already live in 14 states for mobile sports betting, four for iGaming, and 43 for daily fantasy sports.
The appetite for daily fantasy sports and mobile sports betting is bigger than for iGaming. That's likely because the former two do not compete with local land-based casinos the way iGaming does. In that way, the revenue generated from taxing daily fantasy sports and mobile sports betting is incrementally additive to the state, and local politicians do not receive as much pressure to quash their approval.