Here's Why DraftKings Spent Almost Half a Billion Dollars to Acquire Users

Fantasy sports company DraftKings (DKNG -2.31%) has crushed the market average since the beginning of 2020, up nearly 400% during this short time. Investors are cheering the company's robust growth and growing opportunity. However, growth hasn't come cheap, with the company spending nearly $500 million in sales and marketing in 2020 and another $400 million through the first two quarters of 2021.

In this video from Motley Fool Backstage Pass, recorded on Oct. 25, Fool analyst Clay Bruning explains that DraftKings is spending a lot but that is dwarfed by the spending of other companies. Moreover, he explains why these entertainment companies believe this spending is justified.

Clay Bruning: I will just talk a little bit about the current state of the market as well. Right now it's a gold rush in terms of acquiring new players and retaining these players. If you're a sports fan, you've probably been overwhelmed with all the DraftKings. All the points that all the FanDuel ads that are coming on or the Caesars where they have all of the outfits going and you just have a ridiculous amount of dollars going to marketing budgets, whether that's advertising on NFL games or NBA games, offering free bets and form of insurance where they say, "Hey, if you bet $10 on XYZ and lose, we'll give you $10 free bet." Or you even have companies like Penn National (PENN 2.48%) via Barstool that we talked about a little bit earlier that are saying, "Hey, if you bet with us and we win, we will give you a shirt." I think they have the overs club or something like that where they're saying, "Okay, here is what our brand ambassadors are betting on. If you want to bet with us, we're going to boost the odds or we'll give you some free piece of merchandise for being loyal to us, betting with us and trusting us with your service."

Just to put that into perspective. In the last fiscal year, Flutter (FLUT 0.01%), which is FanDuel's parent company, they spent $1.36 billion on sales and marketing. It just blows my mind. Then you have Entain (GMVH.F 2.60%), which again, they are part of the joint venture with BetMGM. They spent $730 million on marketing. DraftKings spent just under $500 million on marketing.

You have a lot of these companies that are just spending ridiculous amount of money because it's so important right now to acquire these players, and hopefully retain them. There has been a lot of chatter saying that none of these providers are really sticky in terms of people are always going to go where there's the best opportunity, the best odds, they are offering the most free bets, the free merchandise or whatever.

I actually think that Penn National, which we talked about that owns part of Barstool, does this really well. They're not even on the list that I'm looking at right now, because they have such a captivating social media following that they don't have to spend nearly as much. I don't necessarily think they're going to be one of the biggest players when you have companies that have such massive market share like that, MGM, Flutter, DraftKings, but if you think about how that's feeding down, they're probably spending a lot less in terms of cost per customer acquired versus a lot of these companies. I think that's a really interesting perspective, and you see a lot of companies bringing on brand ambassadors. I think Shaq was just brought on as one. Jamie Foxx, I believe, is a brand ambassador somewhere as well. It's just the idea that we need to have as many figures on our team as we can, in hopes of attracting as many players as we can.

Super interesting space, something has followed a lot, and in 2021 there's been a couple of states that went live. Michigan went live in January ahead of the Super Bowl. Arizona went live in September ahead of start-up, the NFL. And it was recently announced that New Jersey alone in September, had over $1 billion dollars wagered. In one month in the opening month of the NFL season, they had $1 billion dollars in wagers, but only had, I think $90 million in revenue. It shows that as much money is flowing into a lot of these operators, they're not really making much thus far, but I think that's a pretty big milestone, $1 billion in one month in wagers in the course of being legal for just three years is pretty spectacular.