It's been a great 12 months for DraftKings (DKNG 4.96%) shareholders. After being completely upended by 2022's bear market, DraftKings stock has rallied more than 150% from last March's low. And it's still going. The sheer scope of the gain raises an important question though. That is, is there any more upside left to unleash, or is it too late to buy DraftKings stock?
If you've been waiting on the sidelines to step in, the answer to the question may well get you off the sidelines and onto the playing field.
Two things the market's still missing about DraftKings
No, it's not too late to buy DraftKings stock. Although you've clearly missed a wonderfully bullish move, there's likely to be more of the same in store.
But first things first. DraftKings is a sports betting name. Its roots are in the fantasy sports business, but when the U.S. Supreme Court lifted the federal ban on sports wagering back in 2018, DraftKings was already well-positioned to capitalize on the new opportunity. Since then, 38 states have legalized sports betting of one sort or another.
The industry's resulting growth is the key reason this company's top line reached nearly $3.7 billion last year, versus 2018's mere $226 million.
DKNG Revenue (Quarterly) data by YCharts
With 38 states having legalized sports wagering, however, the bulk of this company's growth is also seemingly in the past. And it's still not turning an annual profit. That makes it tough to get excited about owning the stock. Except, this mindset looks past a couple of important details about DraftKings' future growth potential.
First, simply because the majority of U.S. states have legalized sports wagering doesn't mean the fullness of the opportunity is being realized yet. DraftKings is still informing consumers in many young markets, and in several states wagering options are still relatively limited. In Delaware, Mississippi, Montana, New Mexico, North and South Dakota, Washington, and Wisconsin, for example, sports betting is only allowed in person.
These limitations prevent DraftKings from deploying its online app in these markets, where it would normally enjoy tremendous reach. Several states are currently considering the addition of online sports betting options, though, and many more could do so in the future.
In the meantime, know that two of the nation's biggest states, California and Texas, don't yet permit online betting on sports. If and when either or both do legalize online sportsbooks though, it could prove an oversize boost for the company.
The second reason the market may be underestimating DraftKings' eventual potential is the fact that this company isn't limiting its reach to the United States. The company already has a modest presence overseas, where attitudes regarding sports wagering tend to be a bit more liberal. As these markets also evolve, don't be surprised if DraftKings turns up the heat on this front as well.
Still, for the time being the bulk of the company's focus is on the U.S. There's plenty of opportunity on this one front for the foreseeable future.
Opportunity ahead
But how much opportunity? It depends on whom you ask. Polaris Market Research predicts the global sports betting market is set to grow at an annualized pace of 11.7% through 2030. The United States' sliver of the market could enjoy more than its fair share of this growth, however. Goldman Sachs says the nation's sports wagering industry could eventually become a $45 billion annual business, versus only $10 billion per year now.
The picture looks just as bright when just looking at online sports wagering, where DraftKings shines; it's second only to FanDuel on this front. Straits Research expects the worldwide online sports wagering market to grow an average of more than 11% per year through 2032, jibing with an outlook from Morder Intelligence. North America is predicted to lead this charge, again playing right into the hand DraftKings is holding.
Even the company itself is willing to predict meaningful profit growth ahead. In its most recent Investor Day presentation in November, DraftKings touted the potential for an additional $6.2 billion worth of earnings before interest, taxes, depreciation, and amortization (EBITDA) as more states open the door to sports wagering and more traditional online casino games. (For perspective, the company reported a negative EBITDA of $151 million last year, swinging to a positive adjusted EBITDA of $151 million in the final quarter of 2023.)
Driving this bottom line progress is falling customer acquisition costs in step with the ongoing scale-up of the company's business.
Image source: DraftKings Investor Day Presentation, November 2023.
In this same vein, the analyst community believes DraftKings will near a full-year profit in 2024, up from last year's per-share loss of $1.73. Seeing this milestone on the horizon is likely the key reason DraftKings stock has performed so well of late.
The kicker: DraftKings just named its first-ever chief transformation officer, current CFO Jason Park. Although it remains to be seen exactly what this job entails, the company has said that Park is charged with "lead[ing] initiatives to deploy cutting edge technologies to capture additional operating efficiencies."
The fact that the company created such an uncommon role at this time speaks volumes about DraftKings' expectations for near-term growth and the company's aims for making this growth profitable.
Is DraftKings stock a good pick for you?
DraftKings stock still isn't for the faint of heart. This is a young industry that consumers, regulators, and legislators alike are still trying to figure out. There's plenty of pushing and pulling going on. That can dramatically push and pull a stock which is tightly tethered to expectations for more legalization that may or may not happen as soon as hoped.
There's still a good case to be made for continued upside from DraftKings stock, however. Strong double-digit revenue growth has been the norm here for some time now, as has progress toward profitability. Barring any unlikely regulatory or competitive surprises from here, the company should be able to stay on its current fiscal path for at least several more years, driving the stock upward with it.
Just be prepared for above-average volatility if you're diving in.
