Is it a mistake to bet big on DraftKings?

DraftKings Inc. (DKNG) has been paying shareholders like Fantasy Sports winners since daily fantasy sports and online sports book started trading. The company assumed the shares of Diamond Eagle Acquisitions while merging with SBT and started trading as DKNG on April 24, 2020.

Prior to the convoluted mix coming together, shares of what would become Draftkings closed at $17.53 on the 23rd and then opened at $20.49 on the quasi-IPO day. Since, shares have moved as high as $26.85.  The stock finished trading today at $23.51.

The company hopes to take advantage of legalized sports gambling when live sports return to action. Online sports betting companies are expected to get the dominant lion’s share of the revenue. Morgan Stanley forecast sports betting revenue to exceed $8 billion by 2025, up from $833 million in 2019. (1)

Note, these are revenue estimates, not total dollar amounts wagered, a.k.a. the Vigorish (vig), slang for the house’s cut.

In 2019, Draftkings generated revenue of $323.41 million from daily fantasy sports games, up from $226.28 million in 2018 (42.93% growth), but none it went to the bottom line as the company lost $146.55 million and $76.78 million in 2019 and 2018, respectively. (2)

The newly added SBT, which is an online sportsbook and casino developer, had sales of $96.857 million Euros in 2019. The current conversion rate is $1.08 dollars per Euro, adding roughly another $105 million to the top line for a combined $428.5 million.

According to the prospectus, DKNG could have as many as 336.631 million shares outstanding, giving the company a market cap of $7.91 billion. As of the close of business on May 7, 2020, Draftkings trades at approximately 18.5 times sales.

Let’s put DKNG’s numbers into perspective relative to others in the gaming space.

  • MGM Resorts International (MGM) has a market cap of $7.29 billion, trades at 0.65 times sales with revenue of $11.55 billion.
  • Las Vegas Sands Corp. (LVS) is valued at $35.43 billion, a price to sales ratio (P/S) of 3 with revenue of $11.88 billion.
  • Penn National Gaming, Inc. (PENN) has a market cap of $2.09 billion, P/S of 0.40 and $5.3 billion in sales.
  • William Hill plc (WIMHY) has a $1.24 billion market cap, is valued at 0.64 times sales and 1.58 billion Great Britain Pounds ($1.96 billion) in revenue.

As you can see, investors are paying a premium price for Draftkings compared to more mature peers in their space. DKNG will have some intangible benefits after signing deals with the NBA and NFL. However, we feel like the company is priced to perfection in what’s likely to be an extremely competitive market.

Conclusion: DraftKings Inc. (DKNG) has a user base of 4.3 million unique paid users, of which 564,904 play fantasy games monthly spending an average of $38. Not all users will be in states with legalized sports betting. As a result, management will have to spend to attract additional sport bettors and could continue to lose money for the foreseeable future. The lone analyst with an estimate projects a loss of $0.42 in 2021.

Investors looking to take advantage of the expected explosive online sport betting business might be wiser to consider the likes of MGM, LVS, PENN or WIMHY.