Sports is arguably the greatest entertainment known to humanity; the big game can come down to the last seconds, with drama that's better than nearly any movie script. It's one of the reasons there's so much money in sports, and online sports gaming and betting company DraftKings (DKNG -0.08%) has been scrambling to grab market share in the red-hot U.S. betting market.
The stock's been a bad bet for investors, down 60% over the past year. With shares at depressed levels, it might be time to take a closer look. Here are three reasons investors should consider picking the stock for their portfolio, and one big reason to cut it loose instead.
Reason to buy: Strong growth
DraftKings started with daily and weekly fantasy sports games, where users would choose real players to fill fictional lineups who would accumulate points based on the stats of the players they picked.
But as legal restrictions lifted on online sports betting and online casino gaming (also called iGaming), DraftKings has expanded its business to capture all of these emerging markets. In a competitive sprint to grab market share, DraftKings has had to compete with numerous other players like FanDuel and various casinos looking to bring their brands online.
The company grew its revenue 49% year over year in 2020 to $643 million, and analyst estimates have full-year 2021 revenue at $1.3 billion, a 97% increase over 2020.
Legal Sports Report estimates that the U.S. online sports betting market was worth $18 billion in 2020 and could grow to $37 billion by 2025, doubling in five years. According to Mordor Intelligence, the iGaming market was worth another $2.1 billion in 2020 and should see strong growth. It seems that there is still a lot of market opportunity for the company.
Reason to buy: Market leadership
DraftKings has done an excellent job getting its brand name in front of sports fans. It has partnerships with just about every sports league, a variety of sports team-specific deals, and certain media stations.
As of Q3 2021, the company's market share in its 13 established markets is at 33% for online sports betting. DraftKings is entering new markets as more states legalize, so investors will want to track its market share and see that it maintains it while adding new states to its calculations.
The iGaming segment isn't as strong, holding a 17% share in four established states. It faces more direct competition from casinos in the gaming segment. But someone can easily flip between fantasy sports, betting, and iGaming on the DraftKings smartphone app, so I think there could be an opportunity for its sports betting to cross-sell iGaming to users.
Reason to buy: NFT Potential
DraftKings is also embracing technology to take advantage of new potential revenue streams, including the launch of DraftKings Marketplace, where users can buy sports-related non-fungible tokens (NFTs). The marketplace has exclusive NFTs for athletes like Derek Jeter, Tom Brady, and more. DraftKings could expand on this over time, perhaps tying special privileges, or perks, to certain NFTs in the future. Sports memorabilia seems like a natural fit for the NFT space because it's a space for collectors, and people who collect things like sports cards might gravitate to it.
DraftKings' early example of this is its PreSeason Access Pass, NFTs that have unique digital signatures from athletes and come with access to a Discord social group for special events. This could turn into a notable business for DraftKings if NFTs have staying power over the years ahead.
Reason to sell: Difficult path to profitability
Gambling can be an addictive habit, and DraftKings' research shows that its platform retains 82% of its first-year customers and 87% of its second-year customers. Net revenue retention after the second year is 108%, meaning that the customer base is spending more on the platform once they join.
Said another way, get users on the platform long enough, and they become cash cows. That's why the race for market share is so intense. But this "land grab" has come at a cost to the company's near-term financials.
DraftKings has generated $822 million in revenue through the first three quarters of 2021 but spent $703 million on sales and marketing alone. Its total losses from business operations in these three quarters are almost $1.2 billion, which shows how far the company is from turning a profit.
The company hopes that acquired users will generate enough long-term value to grow revenue while sales and marketing spending slows down over time. Tracking how revenue grows versus sales and marketing expenses will be critical for investors over coming quarters.