DraftKings (DKNG) sees path to profitability
19:19, 3 March 2022
DraftKings (Nasdaq: DKNG) stock 2000 - 3 March 2022DraftKings (DKNG) sees a reduction in customer acquisition costs and the path to profitability, as it maintains its market share with heavy ad spending in states incrementally legalising online sports betting, executives said during its 2022 Investor Day virtual presentation on Thursday.
DraftKings also adjusted its 2022 adjusted EBITDA estimate to $2.10bn (£1.57bn) from $1.70bn, before factoring in the pending Golden Nugget Online acquisition or other new initiatives currently in its pipeline.
DraftKings stock traded 11.3% lower Thursday to as low as $20.89 from the $23.55 opening share price. DraftKings is down 24.7% year to date and 70.9% off its $71.98 all-time high set in March 2000. DraftKings trades over the Nasdaq exchange under the ticker DKNG.
DraftKings (Nasdaq: DKNG) stock YTD - Photo: KoyfinCustomer acquisition costs decline as market matures
Boston, Massachusetts-based DraftKings justified its high 70% to low 80% of revenue spent for acquisition costs with the belief that the top three online sports betting platforms typically control 80% of each market by the third year after legalisation.
He added DraftKings “has more than sufficient capital to execute our plan to profitability.” DraftKings reported over $2bn in cash and cash equivalents on the books as of year-end 2021.
DraftKings cash and cash equivalents as of 31 December 2021 - Photo: DraftKings 10-KWhile no universally accepted market-share data is available and using state revenue totals can be misleading due to each state using different calculation methods, DraftKings estimates it has a 32% share of the total US online sports betting handle (excluding Nevada where sports betting has been legal since 1949), as of year-end 2021.
“In mature markets, like New Jersey, the top three online sportsbooks account for 80% of gross gaming revenue,” noted DraftKings CEO Jason Robins during the virtual conference. As a result, after New Jersey’s $68m of contribution profit in 2021, Robins expects profitability to ramp up quickly in the Garden State this year.
After the second year of operating in a state, Robins predicts DraftKings customer acquisition costs will decline to the low 20% to even high teen rates as a percentage of revenues, as one sees in the European market, where sports betting has been legal for years.
DraftKings Nasdaq:DKNG) estimated revenue at market maturity - Photo: DraftKings Inc.“We expect a greater than 30% EBITDA margin at full maturity,” Robins added.
The large customer acquisition costs are therefore justified in the near term due to high retention rates combined with increased per-user wagering activity over time. DraftKings estimates a greater than 80% customer retention rate and a greater than 120% revenue retention rate, which offsets the customer churn.
“We have a path to profitability," Robins noted. “Year two into year three is better for contribution profitability” in any new market.
Robins conceded, however, that as the only online gaming platform available in bordering states Pennsylvania, New Jersey, New York and Connecticut, the marketing spend bleeds over state lines.
At full maturity, or roughly five years after 65% of the US population has access to legal sports betting and 30% has access to legal iGaming (assuming Canada legalises online sports betting and iGaming for 64% of its population), DraftKings predicts up to $6.7bn in revenue, as long as it can maintain at least a 25% market share in betting and 22.5% in iGaming.
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Non-betting initiatives
Within the iGaming sector, DraftKings has developed its own proprietary gaming products, in addition to the standard casino games. DK Studio, DraftKings’ in-house development platform has created over 50 games played over the app.
The most successful, Robins added, DK Rocket, was introduced last August and has over 90,000 users to date.
DraftKings DK Rocket iGaming productAnother future growth area for DraftKings is its non-fungible token (NFTs) NFT Marketplace, which Robins said “illustrates non-gaming products are a big part of our future.”
A gamified NFT product in collaboration with the National Football League (NFL) Players Association is ready to launch before the start of the 2022 NFL season in September.
Similar to its daily fantasy sports offering, the owner of an individual player’s NFT would be rewarded based on the in-game performance of that player.
“Last year at this time, I’d never even heard of an NFT,” Robins quipped.
DraftKings NFT Marketplace - DraftKings Inc. 2022 Investor PresentationState gaming initiatives
Robins expressed a hope New York State would lower its highest-in-the-nation 51% tax on gaming revenue, or at least allow gaming companies to deduct marketing expenditures from the tax liability.
Additionally, a petition is currently gaining support in California to allow a ballot initiative legalising online sports betting. With a population totalling roughly 40 million – and 14 teams playing in the four largest American professional sports leagues – California is the largest potential gaming market for the online sports betting industry.
“We hope to be on the (California) ballot in '22” Robins added.
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