DraftKings (DKNG -1.27%) has driven considerable returns by capitalizing on the online sports betting market, which is estimated at $90 billion in 2023 and expected to reach $180 billion by 2030. That amounts to a compound annual growth rate (CAGR) of 11%.
However, DraftKings is one of many options when it comes to online sports betting, and much of its business depends on the whims of politicians, some of whom haven't legalized sports betting in their states. That may lead to investors wondering whether such limitations will prevent DraftKings from becoming a millionaire-maker stock.
The growth potential of DraftKings
The stock's history points to considerable growth. Since coming to the market through a special purpose acquisition company (SPAC) in April 2020, the stock has risen more than 150%. That figure includes an 85% decline in the 2021-2022 bear market. As a result, around 130% of its growth occurred in the last year alone.
So far, that growth has primarily come from the 38 U.S. states where sports betting is now legal. Overall, the company offers what it describes as an "immersive sports entertainment experience" in a total of eight countries.
Within DraftKings' markets, its revenue in 2023 was $3.7 billion, a yearly increase of 64%. Adjusted gross margin also rose to 43%, an improvement of 200 basis points (2 percentage points) from the previous year.
Moreover, the company's revenue forecast points to continued growth. In its Q4 2023 earnings report, DraftKings raised its 2024 revenue forecast to between $4.65 billion and $4.9 billion, a $125 million increase in one quarter.
If the forecast holds, that amounts to a 30% revenue increase at the midpoint. It would also take adjusted gross margins to the 45% to 47% range, a further improvement of at least 200 basis points.
Despite that increase, the company's stock sells at a price-to-sales (P/S) ratio of just under 6. That's not as cheap as the sales multiple of just over 2 at the beginning of 2023 but well below the stock's early days, when the P/S ratio rose as high as 43.
What could derail growth?
Unfortunately, such advancements did not prevent a loss of $802 million in 2023, which is less than the nearly $1.4 billion loss in 2022. However, the company spent $1.2 billion on sales and marketing in 2023. Although that may help DraftKings in the long term, it remains a tremendous obstacle to profitability.
Moreover, companies such as Caesars Entertainment, Penn Entertainment, and U.K.-based Flutter Entertainment compete in this market. Admittedly, DraftKings' online presence mitigates some of this competition, but it remains a challenge, nonetheless.
Furthermore, as previously mentioned, the company's growth potential depends on the political climates of its markets. While only 12 states ban online gaming, two of those states are California and Texas, which account for about 70 million of the 340 million people in the U.S. An inability to win over those states could limit the company's domestic-growth potential.
Additionally, the path to millionaire status looks difficult for small investors. DraftKings has a market cap of around $21 billion right now. At that rate, taking a $10,000 investment to $1 million would mean the company's market cap would have to reach $2.1 trillion. While a doubling of the addressable market helps the company's growth, it appears unlikely to grow to that extent.
Is DraftKings a millionaire-maker stock?
Ultimately, DraftKings has the potential to generate significant returns. The company's rising revenue shows it can capture increasing shares of an expanding market, and a relatively reasonable valuation points to some potential for a rising valuation.
Admittedly, competition and the company's considerable losses may ease growth over time. That won't necessarily prevent the stock from increasing or making investors significantly richer. Still, small investors shouldn't count on becoming millionaires from DraftKings stock alone.
