DraftKings: A Long-Term Investment in Online Gambling Growth (NASDAQ:DKNG)

DraftKings Inc. (NASDAQ:DKNG) has been on an upward trend since the end of 2022, with its stock price up 90% over the past year and 15% YTD. With that in mind, we believe there are more benefits that DraftKings can realize moving forward. This has been the case over the years, especially with the significant growth of online gambling and sports betting. This is evidenced by record betting activity on this year’s Super Bowl and the men’s and women’s NCAA basketball tournaments. In my opinion, the growth we’ve seen in the sports betting industry will be a key driver of DraftKings’ substantial revenue growth, given its status as the second-largest sports betting platform in the United States and its growing market share.

Additionally, DraftKings’ acquisition of Jackpocket will give the company entry into the $100 billion lottery industry. Jackpocket also offers DraftKings Jackpocket’s low customer acquisition costs provide an opportunity to market your sports betting platform more efficiently. Due to these cost synergies and the expected growth in the sports betting and lottery industry, I rate DraftKings a Buy with a $103 target price, which suggests a 153% upside from current levels.

Interest in sports betting is at an all-time high

Legal sports betting saw record revenue in 2023, with Americans wagering $119.8 billion on sports betting, according to the American Gaming Association’s Commercial Gaming Revenue Tracker. This is 27.5% higher than in 2022. These bets brought revenue to $10.9 billion, a 44.5% increase over the previous year. Following recent record betting activity on major sporting events, this trend is expected to continue this year.

A record 67.8 million Americans planned to bet on this year’s Super Bowl, according to the American Gaming Association. Bettors plan to bet about $23.1 billion on the Super Bowl this year compared to $16 billion last year, a 44% increase from the previous year. Of the projected $23.1 billion, a record $1.5 billion was expected to be invested in legitimate media.

The men’s and women’s NCAA basketball tournaments were another huge win for the sports betting industry. U.S. bettors were expected to wager more than $2.72 billion on both tournaments using legal sportsbooks, according to the American Gaming Association. This figure is nearly double the amount allocated to the Super Bowl through legal channels. Based on these early results and considering the NBA playoffs and NFL season are still to come, it appears the sports betting industry may be on track to once again generate record profits.

Increased market share

These early results are promising for DraftKings’ future prospects, considering its market share growth over the past year. Since legalizing sports betting became a national issue, DraftKings and Flutter’s (FLUT)’s FanDuel have had a monopoly on the industry, controlling about 75% of it.

As of the end of 2022, DraftKings had a market share of 25% compared to FanDuel’s 43%. Last year, a study by Eilers & Krejcik Gaming found that DraftKings had a 34.1% sports betting market share compared to FanDuel’s 39.3%. I think DraftKings was able to increase its market share last year due to its exclusive deals in Oregon and New Hampshire. This deal gives DraftKings a monopoly on legal sports betting in both states, as it is the only legal sports betting site in both states. Moreover, DraftKings’ only competition in Maine is Caesars (CZR), and both companies are the only two sportsbooks licensed in the state.

This is largely due to Maine’s law giving four tribes a monopoly on online sports betting. On this front, DraftKings is partnering with the Passamaquoddy Tribe and Caesars is partnering with the Wabanaki Nations (Houlton Band of Maliseet Indians, Mi’kmaq Nation and Penobscot Nation). That makes it nearly impossible for FanDuel to enter these markets without changing each state’s sports betting laws.

DraftKings’ market share growth is especially promising considering the expected growth of the industry. The total addressable market for sports betting and iGaming in the U.S. is expected to reach $40 billion by 2030, according to Flutter, FanDuel’s parent company. This forecast is consistent with DraftKings’ own forecast of a total addressable market of $33 for the sports betting and iGaming market. Existing states alone will reach $1 billion in 2028, according to a 2023 Investor Day presentation.

If DraftKings maintains its 34.1% market share, it could generate $13.6 billion in annual revenue by 2030. That said, I believe DraftKings’ market share will increase over the next few years as more states legalize sports betting and more markets allow DraftKings availability. Therefore, I expect DraftKings’ market share in 2030 to be around 38%. This is a reasonable estimate considering the company’s market share has grown over the years. Based on a 38% market share in 2030, I project DraftKings’ 2030 sports betting and iGaming revenue to be approximately $15.2 billion. The company’s earnings in 2030 will benefit from the expected acquisition of leading lottery app Jackpocket.

Get Jack Pocket

DraftKings announced its $750 million acquisition of Jackpocket while announcing its 2023 full-year results. Of this amount, $412.5 million will be acquired in cash and $337.5 million in stock. However, if DraftKings’ stock price is above $42.86 or below $31.68, Jackpocket shareholders will receive a fixed number of shares, 7.8 million or 10.6 million shares, respectively.

According to DraftKings’ fourth quarter investor presentation, U.S. lottery ticket sales in 2023 were $108 billion and are expected to grow at a CAGR of 5% to reach $138 billion by 2028. Meanwhile, Jackpocket’s revenue grew at a CAGR of 114%, from $8 million in 2020 to $78 million in 2023, and is expected to generate $135 million by 2024 (73% YoY growth). Given that Jackpocket’s customer acquisition costs are 80% lower than DraftKings, the acquisition could improve DraftKings’ adjusted EBITDA by $60 million to $100 million in 2026 and $100 million to $150 million in 2028. .

It’s also worth noting the cross-selling opportunities between DraftKings and Jackpocket’s products. A study conducted by DraftKings found that customers with overlap between DraftKings and Jackpocket generated 53% higher sports betting and iGaming total gaming revenue than customers who did not use Jackpocket.

Considering that Jackpocket already has a total of 1.8 million paying customers and 700,000 monthly unique players as of the end of 2023, these synergies could help reduce DraftKings’ marketing costs. This would be another tailwind for DraftKings’ future profitability prospects.

Considering Jackpocket’s revenue growth rate, we believe a 25% CAGR from 2024 to 2030 is a reasonable assumption. At this rate, Jackpocket could generate $515 million in revenue in 2030. Adding these numbers to the previously mentioned sports betting and iGaming revenue projections, DraftKings’ 2030 revenue is expected to be $15.7 billion.

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evaluation

In DraftKings’ 2023 Investor Day presentation, the company forecast 2028 adjusted EBITDA margins of 30%, not including the impact of the Jackpocket acquisition. Given Jackpocket’s lower acquisition costs, cost synergies, and positive contribution from revenue growth, we expect DraftKings’ adjusted EBITDA margin in 2030 to be 35%.

According to the aforementioned revenue projections, DraftKings’ 2030 adjusted EBITDA will be $5.5 billion. Applying the sector median of 9.16 EV/Adjusted EBITDA multiple results in an EV of $50.3 billion. Assuming the company issues a worst-case scenario of 10.6 million shares to acquire Jackpocket and deducts $412.5 million from its cash balance, DraftKings’ price target is $103 per share, representing a 153% upside from the current stock price of $40.68. means.

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danger

Risks to my bullish thesis for DraftKings include increased competition from new entrants to the sports betting industry, most notably Penn Entertainment’s (PENN) ESPN Bet venture. ESPN is the leading sports media brand in the United States, and its ability to cross-sell ESPN Bets during its broadcasts could help it gain popularity and pose a threat to DraftKings and FanDuel’s monopoly on the sports betting industry. Therefore, ESPN Bet could gain market share from both industry leaders, which could affect my revenue projections and, consequently, my price target.

Moreover, because Jackpocket operates as a lottery courier service, there are regulatory risks. This means that the company buys tickets on your behalf and earns money from fees deposited into your balance. Currently, Jackpocket is licensed only in New York and New Jersey. This means that third parties who purchase physical lottery products on behalf of other customers operate in a gray area in most of the 18 unregulated markets. Jackpocket therefore faces the risk of regulatory issues with its courier model and the government’s adoption of online lotteries, which could undermine its usefulness as a courier.

conclusion

In summary, I’m bullish on DraftKings given its industry-leading position and the anticipated growth in the sports betting industry. The company has also been increasing its market share over the years, which may be due to its presence in more markets than its competitors. These two factors could help DraftKings increase its market share in the coming years. Because I expect DraftKings to reach a 38% market share in sports betting and iGaming by 2030.

Additionally, the anticipated Jackpocket acquisition will further boost DraftKings’ bottom line thanks to lower customer acquisition costs, customer overlap, and expected growth in the U.S. lottery industry. I believe these factors could contribute to DraftKings posting a 35% adjusted EBITDA margin in 2030. That’s why we rate the stock a Buy with a target price of $103 per share, 153% above current levels.