If you're a current stockholder, DraftKings (DKNG -1.57%) is a tempting sell to be sure. Shares of the still-unprofitable company are up more than 100% since the end of last year, and seemingly testing the waters of a pullback.
Or if you're not yet on board, it seems like a time to steer clear of the stock. This year's projected sales growth of more than 40% is apt to be halved next year. Yikes.
But if you look at the bigger picture, there's still plenty of meat left on this bone. Indeed, something huge is about to happen that's not being fully factored in.
Sports betting is just getting started
DraftKings offers online betting on sporting events. Its roots are in fantasy sports, but following the Supreme Court's 2018 removal of the federal ban on state-approved sports wagering, the now-legal business has exploded. Many bettors are wagering online, and DraftKings is helping them do it. Depending on the state, it accounts for 20% to 25% of the total market.
And there looks to be more growth ahead. Market data analyst H2 Gambling Capital estimates the U.S. sports betting market will grow from last year's roughly $7 billion to more than $23 billion in 2030. That jibes with projections from Mordor Intelligence and Data Bridge Market Research.
Roughly one-third of that growth is expoected to come from more states legalizing sports betting. UBS analyst Robin Farley recently upgraded DraftKings stock from a neutral rating to a buy, based on the potential upside from these states.
The rest of sports betting's growth will be organic. And Farley believes DraftKings can deliver more than 20% compound annual revenue growth over the next three years.
Given these tailwinds, the optimism seems well founded.
Turning positive with continued growth
This particular stretch of industrywide growth should be more than enough to drag DraftKings out of the red and into the black.
Yes, its sales growth is slowing, but remember that the more any company increases revenue, the tougher its top-line comparisons become. Next year's expected sales figure of $3.9 billion is $700 million more than this year's estimate, and that's still a solid comparison to this year's likely top-line growth of $900 million -- a banner year by any measure.
The biggest upshot of this continued growth, however, is what's expected to happen between 2024 and 2026. That's when a wave of numbers on its income statement should start turning positive, beginning with operating income and ending with the company's bottom line based on generally accepted accounting principles (GAAP).
Data source: Thomson Reuters. Chart by author. All figures except per-share earnings are in millions of dollars.
What's changing? Nothing about the operation itself. Most fixed costs will remain (mostly) fixed. The biggest change is simply more scale -- specifically, more revenue. There should be enough of it to start covering all of DraftKings' expenses with at least a little left over.
This is the eventual turning of the tide the market wasn't seeing in 2021 and 2022, when the stock was getting hammered. Even with the big jump this year, shares are still priced 70% below their early 2021 peak.
Place your bets
Is this a pick for everyone's portfolio? No.
Even with a swing to profits on the horizon, there's above-average risk in owning DraftKings stock. New competitors could appear, and existing ones could step up their games. This is also still a relatively new industry; something unexpected (including new regulation) could pop up.
But once again, take a step back and look at the bigger picture. Millions of people living in markets where DraftKings operates already love sports. A bunch of them also like to bet.
Nielsen reports that nearly half of all NFL fans are interested in wagering on football games, while more than 60% of the nation's hockey fans feeling the same.
Market research firm CRG Global finds that sports fans who bet on games are far more likely to watch them. And several professional teams have already capitalized upon this interest by affiliating themselves with wagering platforms, including DraftKings.
Currently, 33 states now permit sports betting of some sort. And as the remaining states' budgets continue to feel a strain, look for more of them to open up this tax-revenue spigot. And those 33 that are already connected to the faucet could add more betting options.
The industry's double-digit growth outlooks hold water. So does UBS' bullish case for DraftKings.
Stick with it if you own it, or step into it if you're thinking of doing so. The tide might be moving slowly, but it's a big tide, and it's moving in the right direction.
