Online gaming company DraftKings (DKNG 1.59%) offered up some potentially exciting news for investors on March 3. Management said it underestimated its market opportunity by $13 billion at an investor day presentation.
DraftKings offers customers a mobile sportsbook, iGaming, and daily fantasy sports betting. It's growing revenue and customers at a rapid rate as state legislatures are warming up to the idea of legalizing the activities mentioned above. That warming suggests DraftKings has a much bigger audience for its services.
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DraftKings' total addressable market now estimated at $80 billion
DraftKings said its total addressable market is larger than initially expected during its investor day, raising the figure to $80 billion from the previously estimated $67 billion. Of course, that does not mean that DraftKings will capture this entire market, but a more significant market is still great news for shareholders.
That's because DraftKings can generate more revenue without growing its market share. The distinction is important because it is generally more challenging to increase revenue by taking market share than growth in the overall market.
Already, DraftKings has achieved robust revenue growth over the years. From 2017 to 2021, DraftKings' revenue grew from $192 million to $1.3 billion. Most of that increase is attributable to gaining access to new state markets as the legalization of internet gambling is gaining momentum across the U.S. It is now live with mobile sports betting in 17 states, representing 36% of the population, the highest among its competitors. iGaming is not as far along, and DraftKings is live in five states representing 11% of the populace.
In the longer run, DraftKings estimates it can generate annual revenue in the range of $6.7 billion to $9.5 billion. That is based on a myriad of assumptions, including that it will gain market share in the 20% to 30% range for online sports betting, 20% to 25% with iGaming, and 10% to 20% of a $6 billion Canadian online gambling market. What's more, DraftKings assumes 65% of the U.S. population will have access to online sports betting and 30% to iGaming. That's a big step from the current levels of 36% and 13%, respectively.
Interestingly, on this year's investor day, DraftKings did not increase its estimate of the percentage of the population it believes will have access to legalized online gaming. Instead, it raised the outlook on the size of the mobile sportsbook, iGaming, and Canadian market opportunity by $4 billion, $8 billion, and $1 billion, respectively, from the same presentation last year. Additionally, it raised its expected market share in iGaming from 17.5% at the midpoint to 22.5% at the same.
The market was not impressed
Despite the better outlook, DraftKings' stock price did not get a boost. On the contrary, its stock has been down 16% since investor day on March 3. It's hard to discern why it did not get a better response from shareholders, but one explanation could be all the estimates and assumptions used to make the upgrades. Another cause could be investors' fear that management could use the higher market estimates to justify further marketing spending.
This growth stock is taking heat over the last year as losses mount on the bottom line. DraftKings' most prominent expense item is sales and marketing, which it ramps up with each new state launch. Regardless, the stock price is down more than 75% from its high, and it's having difficulty turning things around.
