DraftKings (DKNG 3.69%) has been on a hot streak with the stock more than doubling in the past year. The company has rapidly expanded as more and more U.S. states legalize online sports betting.
Given the stock's strong performance, is it is too late to invest in this leader in the online sports betting industry?
NASDAQ: DKNG
Key Data Points
Potential to get into more states
The biggest tailwind for DraftKings has been the gradual rollout of online sports betting across the U.S., including 30 states and Washington D.C.
For its part, after entering North Carolina last month, DraftKings is currently operating in 27 of those markets. North Carolina is the ninth largest state by population, so this latest market entry should provide a sizable boost to revenue in 2024. And with North Carolina State fighting its way to the NCAA Men's Basketball Final Four, DraftKings appears to have launched there at an opportune time as well. The NCAA Men's Basketball Tournament is one of the largest sports betting events in the world.
However, DraftKings has yet to break into the three largest states by population: California, Texas, and Florida. The former two haven't legalized online sports betting, while Florida only allows it through the Seminole Tribe. Getting into any of these states would be a big opportunity for the company. Texas will have a vote in 2025 regarding online sports betting, while California and Florida will have ballot referendums in 2026.
Texas looks like the most likely near-term opportunity among this trio as it took steps toward legalizing online sports betting last year. Georgia, the eighth most populous state, also presents an untapped opportunity, though the need for a state constitutional amendment makes its prospects a bit murky.
Outside of online sports betting, expanding its online casinos is another opportunity for DraftKings. Currently, only seven states permit online casino games, but there are five other states that could move in the same direction in the near future.
Image source: Getty Images.
Operating leverage
As DraftKings grows its empire, the company continues to show operating leverage, which is how revenue growth turns into profits. When the company first enters a new market, it spends heavily on advertising and promotions to attract new users to its platform. However, as that market matures, it can dial down that spending, while revenue continues to grow because active customers tend to make more bets on the platform over time.
New states have tended to take about two to three years to turn profitable. However, the process has been speeding up with recent launches in Ohio and Massachusetts only taking two months to become profitable.
This can be attributed to DraftKings' strong brand recognition. The company has established itself as a leader in fantasy sports, so when it enters a new state for online sports betting, it already has strong leads for new users in that market. Meanwhile, bettors are often already aware of the company's offering when it's available in a nearby state. This allows the company to more quickly acquire customers in new states, while these markets also mature more quickly.
Why is this important to investors? Because DraftKings has been able to reduce certain expenses while still quickly growing revenue, which is starting to help the company turn profitable. For example, in Q4 2023, it was able to reduce sales and marketing expenses 16% year over year while increasing revenue 44%. This led the company to report adjusted EBITDA of $151 million, reversing the year-ago period's $50 million loss.
Looking ahead, management is guiding for adjusted EBITDA of $410 million to $510 million in 2024, compared to a $151 million loss last year. Eventually, this momentum should allow the company to report positive GAAP earnings as well.
Not too late to buy
DraftKings is still in the early innings of its huge growth opportunity. Its online sports betting platform only reaches about 50% of the U.S. population, while its online casino offering is still small. That leaves plenty of revenue growth on the table, while at the same time, the company is just beginning to show the type of operating leverage its business can have. That's a strong combination that makes DraftKings look like a long-term winner with plenty of upside in the years ahead.
