Online gambling company DraftKings (DKNG 0.09%) held an investor day on March 3. One of the crucial developments that shareholders came away with was that management had initially underestimated its long-term profit potential.
As a result, DraftKings raised that profit outlook and explained the good news to investors. Let's unpack what was said during the presentation.
Image source: Getty Images.
Rising market share partly accounts for the better outlook
DraftKings operates an online sportsbook, iGaming, and a daily fantasy sports platform primarily in the U.S. It is gaining access to new states as legislatures cautiously legalize the activities.
On its call with investors recently, management said it now expects the company to achieve adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.1 billion annually when the business reach its full potential. That's an increase of $400 million, or 24%, from the previously estimated figure of $1.7 billion. The company didn't say exactly how long it thinks it will take to get there. For perspective, EBITDA totaled $676 million last year.
The company's more recently optimistic outlook is driven mainly by a better top-line forecast. Previously, DraftKings estimated it could generate $5.4 billion in revenue, from which $3 billion would flow to gross profit. The March 3 update raised those figures to $6.7 billion in revenue, from which $3.9 billion would flow to gross profit. That's a big improvement from last year's revenue, which totaled $1.3 billion.
In other words, management thinks it will earn more revenue and at a higher rate of overall gross profit margin. The previous gross profit margin implied in the forecast was 55.6% while the update suggests a 58.2% margin.
Interestingly, the higher revenue outlook is attributed to a massive 500-basis-point increase in the estimated market share of the U.S. iGaming market that DraftKings hopes to capture. During its 2021 investor day, management pegged this figure at 17.5%; in the most recent update, it was 22.5%. The boost might be justified considering that DraftKings acquired an iGaming company between the two investor day presentations.
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What this could mean for DraftKings shareholders
The market was not impressed, and shares of DraftKings have fallen about 12% since the company made these pronouncements. Of course, another explanation could be the widespread sell-off of unprofitable growth stocks that is plaguing markets. Looking back further, DraftKings is down 74% off its high reached in January of 2021.
DraftKings provided a rosy outlook, but there is no guarantee it will achieve the targets. Meanwhile, the company is generating massive losses on the bottom line. Each time it gains access to a new state, it invests aggressively to acquire customers. In its most recent fiscal year ended Dec. 31, it reported $1.5 billion in net losses. That was up from $1.2 billion in losses in the prior year.
Investors are growing tired of promises and are looking for results.
