For better or worse, I'm a huge sports fan. (I say "worse" because I tend to cheer for mediocre teams, but that's neither here nor there.) Given my liking of sports, I've been aware of the workings of sports betting for quite a while. However, even the most casual sports fans have been exposed to sports betting in the past few years.
It seems almost impossible to turn on a sports game without being bombarded with commercials from different sports betting companies and platforms. It seems almost impossible to escape at this point, but the positive is that it gives investors another industry to consider.
One company leading the charge on sports betting is DraftKings (DKNG 0.12%). Although the stock has experienced many ups and downs since its initial public offering (IPO), its long-term potential remains strong.
A legalization domino effect could expand its total address market
When the U.S. Supreme Court ruled in May 2018 that states could decide if and how to regulate sports betting, only five states had legalized it: Delaware, Nevada, New Jersey, Mississippi, and West Virginia. As of today, that number has jumped to 27. DraftKings operates its DraftKings Sportsbook in those 27 states and its daily fantasy sports product in 44 states.
More states have become open to the idea of legalizing sports betting, giving DraftKings an opportunity to expand its total addressable market, aside from just increasing the number of users in states where it currently operates.
As more sports betting tax revenue figures are released, I imagine it'll become much easier for states to convince themselves to give it a try. Notably, the country's two most populous states (California and Texas) are currently holdouts but have made efforts to change this in the coming years.
It remains to be seen which states will, ultimately, legalize sports betting, but this is still early in determining just how big the sports betting market can be in the U.S.
DraftKings' financials are encouraging for its profitability goal
DraftKings has made huge financial strides on its way to profitability. The company is knee-deep in its growth mode, so it makes sense that the focus is on capturing market share over profitability. Even so, investors should be encouraged by how close profitability may be for it.
In the first quarter, DraftKings generated $1.18 billion in revenue, up 53% year over year (YOY) and considerably more than five years ago.
DKNG Revenue (Quarterly) data by YCharts.
The impressive quarter caused DraftKings to raise its 2024 revenue guidance to $4.9 billion from $4.78 billion and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance to $500 million from $460 million.
At the end of the first quarter, the company had 7.5 million unique customers, up 400,000 from last quarter and 1.5 million from one year ago. Add in that its average revenue per unique monthly user jumped from $92 to $114 in one year, and it seems the revenue growth should continue at an impressive pace.
Strategic acquisitions could fuel DraftKings' growth
DraftKings' main areas of operation are sports betting, daily fantasy sports, and iGaming, and that will continue to be its bread and butter for the foreseeable future. However, DraftKings recently announced the completion of its $750 million acquisition of Jackpocket, a third-party lottery app that allows you to purchase official state lottery tickets via smartphone.
The Jackpocket acquisition will benefit DraftKings in a few ways. Aside from expanding its offerings, it gives DraftKings direct access to the thriving U.S. digital lottery system, which is steadily growing in size. It also gives DraftKings greater chances to cross-sell, introducing Jackpocket's customers to DraftKings offerings and vice versa. This could be a major step toward increasing revenue and customer lifetime value.
Growing organically is always great, but sometimes, you gotta pay to play (no pun intended). With $1.2 billion in cash as of the end of March and an expected $1.6 billion by the end of the year, DraftKings is in a good position to make strategic acquisitions and invest in innovative technologies to boost its offerings.
