As an avid sports fan, I've been aware of the sports betting world for a while. However, even many casual and non-casual sports watchers can testify to just how prevalent sports betting is becoming. All it takes is watching a game (in virtually any sport) to see commercials for emerging sports betting platforms.
One of the leaders in the sports betting world is DraftKings (DKNG 4.96%), which has been operating for well over a decade. Despite being one of the industry's pioneers, the company is on the earlier end of what it can ultimately become. If you're looking for a good buy within an emerging bull market, here are three reasons to look no further.
1. Its market size has lots of room to expand
Since the U.S. Supreme Court paved the way for states to legalize and regulate sports betting in May 2018, momentum has been growing. When the Supreme Court made its decision, five states had legalized sports betting. Now, 38 states and Washington, D.C., are on board, and DraftKings currently only operates in 26 of them (it'll be 27 when North Carolina becomes operational).
DraftKings has two main ways to expand its total addressable market: 1) launching in states where sports betting is legal but not yet operational, and 2) new states legalizing it. Each scenario presents DraftKings with millions of new adults to target. The more, the merrier, especially with the company increasing its revenue per monthly unique payer (MUP). In 2022, DraftKings averaged $109 per MUP; in 2023, it increased to $116.
When the states that are currently holding out decide to legalize sports betting remains to be seen, but there are a handful with legislation in the pipeline. The mainstream sports betting industry is relatively young in the grand scheme of things. As states get a gist of the tax revenue that can be generated from legalization, it's feasible to think more and more will get on board. As a leader in the space, DraftKings is well-positioned to capitalize on that trend.
2. Its financials are headed in the right direction
DraftKings' main focus right now is growth and obtaining market share, but that hasn't slowed down the company's path to profitability. Although it's still unprofitable, revenue growth has been impressive. In the fourth quarter of 2023, it made $1.23 billion in revenue, up 44% year over year and considerably more than just a few years prior.
DKNG Revenue (Quarterly) data by YCharts
A strong finish to the year caused DraftKings to raise its fiscal 2024 revenue guidance to between $4.65 billion and $4.9 billion, up from $4.5 billion to $4.8 billion. The new guidance would give it 27% to 34% year-over-year revenue growth.
Revenue aside, DraftKings expects to generate $310 million to $410 million of free cash flow in 2024. This gives the company the financial flexibility to pursue acquisitions to speed up growth (one of which we cover below), and invest in technology to better its core product.
Profitability matters, but right now DraftKings' focus on growth is the right long-term move.
3. Its Jackpocket acquisition helps diversify the business
DraftKings recently announced that it has agreed to acquire Jackpocket in a deal worth $750 million. Jackpocket is the leading lottery app in the U.S., and the deal gives DraftKings a presence in the $100 billion-plus industry that's still growing at a good pace. The acquisition allows DraftKings to cross-sell its products, increase customer acquisition, and strengthen its position through higher customer lifetime value.
DraftKings estimates the deal will drive $260 million to $340 million of incremental revenue (additional revenue generated from an acquisition) and $60 million to $100 million of incremental adjusted EBITDA by its fiscal 2026. By fiscal 2028, it expects these numbers to be $350 million to $450 million and $100 million to $150 million, respectively.
Sports betting will continue to be DraftKings' bread and butter, but opening new revenue streams strengthens its business and lessens some of the risks of concentrated business models.
