Sports is an interesting thing. It is one of the few forms of entertainment that have the ability to bring together people of all ages and demographics. Fans become emotionally invested in their favorite teams. Watching a game can be a fun activity, and the advent of legal wagering is quickly fueling a new interest in the sports market.
While casinos have been around for ages, if you felt daring enough to place a bet, you would have to travel to the gambling den. However, as technology spreads, sports wagering is now as easy as opening an app on your phone and placing a bet.
One company pioneering this movement is DraftKings (DKNG 0.59%). It recently reported fourth-quarter and full-year 2022 results and did not disappoint. Let's dig in and see if DraftKings is worth a bet in your portfolio.
The addressable market is growing
One of the most important things to keep in mind about sports wagering is that it is not legal nationwide. For this reason alone, the serviceable market for companies like DraftKings is finite. This means that it is paramount that DraftKings understands both where it should be operating, and the costs associated with those operations in order to achieve efficient unit economics.
For instance, a state may pass legislation making mobile sports betting legal. However, it would be prudent for DraftKings' management to analyze the demographics of that particular state, and use available data to decide if launching in that location makes financial sense.
At the time of this writing, roughly 60% of U.S. states allow mobile sports wagering. Of those states, DraftKings operates in about 20.
During the company's Q4 2022 earnings call, DraftKings CFO Jason Park reiterated these points by explaining to investors,
Our state unit economics are progressing nicely against our expectations, with an early read that newer states are achieving positive contribution profit faster than we originally projected. The core of our business model is that we invest into a new state for approximately two years through promotions and marketing. Following this period, in our experience a state turns contribution profit positive and begins to generate significant growth in contribution profit.
During the Q4 earnings call, investors learned that average revenue per monthly unique player was $109 during the fourth quarter of 2022. This represented a 42% increase compared to Q4 2021, and seemingly backs up the CFO's claim regarding strengthening unit economics.
What does Wall Street think?
For the year ended Dec. 31, 2022, DraftKings reported revenue of $2.2 billion, which represented 69% growth year over year. While DraftKings still operates at a loss, the company's cash burn is declining. For the year ended Dec. 31, DraftKings' operating loss was negative $1.5 billion, which was roughly a $50 million improvement over 2021.
Management appears to be doubling down on expense reduction, as the quarterly investor presentation specifically called out its goal of slower growth in fixed expenses in 2023 and a further deceleration in 2024.
At the time of this writing, DraftKings trades at about $18 per share, which several banks believe to be undervalued. Following the earnings call, several reputable Wall Street institutions including Morgan Stanley and Truist Securities issued revised price targets. Both increased prior stock price estimates by over 20%, and believe DraftKings is worth roughly $22 per share.
Even more bullish sentiment came from research firms Canaccord Genuity, Oppenheimer, and Craig-Hallum. Each of these have a buy or buy equivalent rating on the stock, and have fair value ranges from $27 to $30 per share.
Image source: Getty Images.
Don't bet the farm
With a growing addressable market, improving unit economics, and positive outlook from Wall Street, it can be difficult, even tempting, to miss the larger picture. DraftKings is experiencing impressive growth and appears to have a solid plan to continue executing. However, the sports wagering market is littered with competition.
DraftKings' primary competitor is another sports-focused app called FanDuel. FanDuel is privately held, but majority owned by Flutter Entertainment and Boyd Gaming. Moreover, Penn National Gaming completed its acquisition of media company Barstool Sports, which also provides a mobile application for online betting. And finally, FuboTV operates as a sports-themed streaming platform and allows subscribers to place in-game bets through its product. On top of all of the sports-concentrated apps, traditional casinos such as MGM Resorts International have also rolled out sportsbooks within their apps.
Despite the competitive landscape, the general consensus on Wall Street is that DraftKings stock is cheap. While sports wagering has a long road ahead, the company's financial results and key performance indicators illustrate consistent in-roads in the mainstream. Given its current valuation, now may be an ideal time to lower your cost basis or initiate a small position in the market leader.
