There's no denying it. DraftKings' (DKNG 0.59%) fourth quarter was a home run. Revenue improved 81% on a year-over-year basis. And while the sports-wagering outfit is still losing money, the shrinking loss came in better than expected, as did its top line. The company also upped its guidance for the year now underway. The news sent shares 15% higher on Feb. 17, extending their year-to-date rally to more than 80%.
The sheer span and speed of this gain sets the stage for at least a little bit of profit-taking now ... maybe. Don't sweat it if and when that happens, though. There's still plenty of upside in store for this name. That's because there's so much more in store for the sports wagering industry than for DraftKings itself.
So much untapped potential
For the fourth quarter, DraftKings lost nearly $243 million on sales of $855 million. The top line surged from $473 million in the year-ago period, and while still in the red, the bottom line also marked an improvement from last year's $326 million loss. The company's biggest bottom-line boost came from curtailed administrative and general spending. Moreover, the fourth quarter's improvements extend progress that started at the beginning of last year. At its current pace, actual profits are on the horizon.
Data source: Thomson Reuters. Chart by author.
The real story here, however, isn't what's happened so far -- it's what's not happened yet. That's the legalization of sports wagering in several key markets.
As of right now, only 35 states in the U.S. allow for some sort of sports betting, according to data compiled by sports betting news site Action Network. And among those 35, what sort of betting is permitted can vary. Not every state allows both online and in-person betting on most major sporting events, for instance. In fact, very few states offer the entire gamut of wagering.
That's changing, though, and fast. Maine and Nebraska are on a course to legalize sports betting, having already passed the necessary legislation. Massachusetts is in the legalization queue as well with launches of this form of wagering expected later this year. Look for more states to follow suit in 2024.
This accelerating wave of legalization merely reflects the ever more open-minded attitude toward the business. A survey jointly taken last year by the Washington Post and the University of Maryland indicates that 66% of the U.S. population is now in favor of legalized sports wagering. That's up from just 55% five years back.
The very biggest and best aren't yet on board
Largely overlooked within this rising tide of legalization, however, is which states have yet to join (or rejoin) the sports wagering fray.
As of this writing, no form of sports betting outside of horse racing is permitted in California, Florida, or Texas. Yet, all three states are -- or still are -- entertaining the possibility of legalizing sports betting in the foreseeable future, or dramatically expanding sports wagering options (Florida's legalization was indefinitely suspended last year after being put into place in 2021, although it's possible it could be re-legalized around 2025).
It matters to current and would-be DraftKings investors for one simple reason: These three states alone account for more than one-fourth of the entire U.S. population. They're are also among the nation's most visited by tourists. It's not inconceivable that people would travel to Texas, Florida, and California specifically to bet on sports, upping the effect that wagering legalization would have on the sports betting business itself.
In this vein, market research outfit IMARC estimates the U.S. sports betting market will grow at an annualized pace of 13.7% through 2027, easily exceeding $10 billion by the end of that period. In that it's still a highly fragmented market, though, DraftKings has an opportunity to win more than its fair share of this growth.
Time to take a swing on DraftKings
As is the case with investing, there's no guarantee any or all of these big states will approve sports betting anytime soon ... if ever. Despite the apparent momentum, the legalization effort thus far has proven strangely complicated.
From a risk-versus-reward perspective, however, there's reason to be cautiously optimistic about DraftKings stock. The company's making revenue and profit progress in an environment where both are proving tough to muster together. And that's happening without the benefit of several major markets. Just think how big a leap DraftKings could make if and when the rest of the U.S. -- including its three most populous states -- joins the legalization movement that's already well underway.
