Snap (SNAP 27.63%) and DraftKings (DKNG 4.96%) make an unlikely pair, but the duo is certainly related. DraftKings purchases advertising space on the social media platform. In that regard, they shared a significant win recently, with DraftKings' ad campaign delivering an excellent return on investment. Let's look at the news and determine which stock is a better buy.
Developing a successful relationship
In the conference call that followed Snap's first-quarter earnings release on April 21, management had this to say about a recent ad campaign by DraftKings: "Sports betting company, DraftKings, ran a conversion lift study in the two weeks leading up to the Super Bowl across several established sportsbook states and observed a 10.8% lift in app installs and a 188% lift in first-time deposits for males 21-plus, outpacing their install and deposit goals."
That's excellent news for DraftKings, which in its most recent quarter (ended in March) spent 77% of revenue on sales and marketing. The company must gain approval to offer its online gambling services state by state. With each state it gains access to, it spends aggressively on sales and marketing to attract new customers before competitors can. For that reason, the excellent results from the investment in advertising from Snap could indicate an avenue where DraftKings can derive better results from its sales and marketing budget.
Similarly, it's great news for Snap that customers are getting an excellent return on their investments in advertising on its platform. That could encourage companies like DraftKings to increase the budget allocated to Snap. Ultimately, marketers spend money on advertising for a purpose, whether that be to increase customer signups, induce purchases, or secure votes for a political campaign. If their return on investment is better than expected, they will likely ramp up that spending over time.
DraftKings is the better stock to buy
News of the successful ad campaign is good for DraftKings and Snap. However, if you had to choose which stock to buy, pick DraftKings. Each of the stocks is down considerably off the highs, but Snap is still more expensive than DraftKings.
DKNG PS Ratio data by YCharts
Moreover, Snap faces stiff headwinds that are slowing revenue growth in the near term, potentially dampening its long-term prospects. These include privacy policy changes at phone manufacturers that limit Snap's ability to collect data and sell targeted ads. Additionally, the Russian invasion of Ukraine has created uncertainty among businesses, causing many to hold off on spending until they know more about the fallout.
DKNG Revenue (Annual YoY Growth) data by YCharts
Meanwhile, DraftKings is poised to gain access to new markets as states legalize online gambling to generate tax revenue. Thus far, DraftKings is live in 17 states for sports betting and five for iGaming (casino-style games).
Admittedly, it's not an apples-to-apples comparison, considering DraftKings is an internet gambling company and Snap is a social media business. That said, DraftKings is the better buy in this matchup.
