Part 2: Deep dive on DraftKings (DKNG)
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Company: DraftKings
Ticker: (DKNG)
Website: DraftKings.com
IPO date: April 24, 2020 (through SPAC)
IPO price: $20.49
Current stock price: $31.74
Outstanding shares: 463.9 million
52 week high: $32.45 on July 28, 2023
52 week low: $10.69 on December 28, 2022
ATH: $74.38 on March 22, 2021
Market cap: $14.724 billion
Net cash/debt: -$206.4 million (net debt)
Enterprise value: $14.931 billion
Headquarters: Boston, Massachusetts, United States
Number of employees: 4,200+
Average price target from analysts: $31.48
Investor Relations [click here]
Q2 2023 Earnings Report [click here]
Q2 2023 Earnings Webcast [click here]
Q2 2023 Earnings Presentation [click here]
Moffett Nathanson Technology Conference [click here]
18th Annual Needham Technology Conference [click here]
Outline
Introduction [part 1]
Company Background [part 1]
Opportunity [part 1]
Business Model [part 1]
Competitive Advantages [part 1]
Risks [part 1]
Valuation [part 2]
Investment Model [part 2]
Analysts [part 2]
Technicals [part 2]
Conclusion [part 2]
Additional Sources [part 1, 2]
Below the paywall is part 1 of the DraftKings deep dive along with links to my investment portfolio (up ~100% YTD), daily activity, investment models and daily webcasts.
As a paid subscriber you have access to the following:
My investment portfolio [click here] new link for August/September
My investment models [click here] new link for August/September
My daily webcasts [click here] new link for August/September
Before going through this deep dive I would suggest watching this CNBC interview with the CEO of DKNG after they reported earnings last week…
Articles about the new ESPN/PENN deal that could be bad for DraftKings:
Introduction, part 2
After spending the last few days thinking about the possible ramifications for DraftKings after losing their ESPN partnership, I definitely think it’s a big negative but hard to say just how big. We also now know that Disney sold their entire DKNG’s stake in Q2 which was disclosed in their earnings report last week… [click here] and buried in their earnings report under the “other income” section [click here].
I don’t think this news is an automatic investment thesis killer over the long term but it’s definitely enough to scare me away in the short term.
Not only is DKNG losing their partnership with ESPN/ABC and can’t advertise on those networks, but even worse is that now DKNG has to compete directly with ESPN/ABC/PENN on customer acquisition which includes marketing spend plus promotional activities. Having another major player in the sports betting market also increases churn by decreasing customer loyalty, not good for DKNG margins.
I think DKNG can still hit the revenue estimates over the next 3-5 years but it probably means they’ll be spending 25-50% more on marketing which will directly impact net income margins. So whereas the analysts were forecasting 9% net income margins in 2025, 12.8% in 2026 and 19.9% in 2027 — I think DKNG will be lucky to hit 3% in 2025, 6% in 2026 and 9% in 2027 which changes the potential upside for me over the next 3-5 years and why I won’t be buying DKNG anytime soon for my investment portfolio.
I do believe the market opportunity for legalized sports betting will continue to increase however now DKNG has more competition and it's unclear how big of a threat ESPN/PENN will become for DKNG, FanDuel and the smaller/regional players. DKNG and FanDuel tried to merge 6 years ago but the regulators blocked it, I wonder if the regulators would be more willing to allow that merger now that there’s more competition because that might change my mind. Personally I doubt the FTC would be okay with that merger because it would still give the combined company more than 80% market share but it would certainly reduce customer acquisition costs.
Valuation
We really don’t know yet what the ESPN/PENN deal will mean for DKNG financials over the next few years but hopefully DKNG can hit their guidance for this year which they gave on August 3rd in the 2023 Q2 earnings report. Their new 2023 revenue guidance was $3.46 billion to $3.54 billion although EBITDA is still expected to be negative so it’s impossible to come up with an EV/EBITDA multiple.
Using the current enterprise value of $13.9 billion (after the stock was down 7.4% this past week), DKNG is now trading at approx 4x 2023 EV/SALES
Using that $13.9B enterprise value and the 2024 estimates (which might come down if analysts get nervous about the impact of ESPN/PENN deal and lower their numbers), DKNG is now trading at 3.3x 2024 EV/SALES and 56x 2024 EV/EBITDA.
If this ESPN/PENN deal doesn’t impede DKNG as badly as I think it might and they’re able to hit the 2025 estimates below, than DKNG is now trading at 2.7x 2025 EV/SALES and 18.4x 2025 EV/EBITDA.
If DKNG is able to brush off the ESPN/PENN deal and continues to grow revenues and improve margins then I think the stock could triple over the next 4-5 years because as you can see below from the current estimates, the analysts are expecting massive EBITDA margin improvement over the next 3-5 years. If DKNG is really doing $1.5B of EBITDA in 2027, they could be trading at 30x EBITDA multiple which puts the market cap at $45B which is more than 3x or 200% from where it closed on Friday.
I’m just worried now that DKNG won’t get to $1.5B of EBITDA in 2027, so maybe it’s $1.0B and instead of 30x they get a 26x multiple which puts the market cap at $26B which is 2x or 100% upside from where the stock closed on Friday.
Investment Model
Here’s my updated investment model with some slightly more conservative estimates for the next 3-5 years on both revenues and margins, using these numbers it puts the price target in 4-5 years in the $60-65 range however before this ESPN/PENN deal my numbers were definitely more bullish and the price target in 4-5 years was in the $90-100 range.
Analysts
Currently the DKNG price target between 29 analysts is $29.20 with most of them carrying a buy/outperform rating. Only a couple analysts have updated their ratings and price targets since the ESPN/PENN deal was announced but we might see more this week.
Here’s what the analysts have been saying about DKNG:
August 10th: Argus analyst John Staszak raised the firm's price target on DraftKings to $34 from $30 and keeps a Buy rating on the shares. Reflecting the legalization of online sports betting in additional states, the firm expects the company's revenue to jump to $3.2B in 2023 from $2.2B in 2022, with tailwinds for the stock that include market share gains and greater customer retention, the analyst tells investors in a research note.
August 9th: Deutsche Bank analyst Carlo Santarelli views Penn Entertainment's (PENN) strategic alliance with Disney's (DIS) ESPN as a net positive for Penn, saying it was clear the Barstool brand didn't have the customer acquisition network it advertised and the company now has a new potential growth while essentially eliminating the risks associated with Barstool. The firm also sees the news as positive for Caesars (CZR) and DraftKings (DKNG), as it "relinquishes both from their committed spend with ESPN over the coming years." While it hasn't necessarily been widely publicized, Caesars' and DraftKings' respective ESPN partnerships were "absolute anchors," with the customer acquisition spend, through the ESPN channel, likely the most expensive channel on a per customer acquired basis, Deutsche contends. The firm thinks the breakup is likely immaterial to both companies' net revenue, and tangibly favorable for adjusted EBITDA.
August 9th: BofA analyst Shaun Kelley notes that Penn Entertainment (PENN) shares were up "big" in after-hours trading while DraftKings' (DKNG) shares were down after Penn made two strategic announcements: an exclusive U.S. online sports betting agreement with Disney's (DIS) ESPN and selling Barstool Sports back to founder David Portnoy. BofA attributes much of the reaction to a cautious investor setup for Penn given both domestic core gaming concerns and uncertainty around Barstool and says it sees "a constructive risk-reward" for Penn entering the deal with ESPN, but the firm is also increasingly convinced that the product and tech barriers DraftKings and Flutter's (PDYPY) FanDuel are creating make market share moves increasingly difficult. BofA maintains a Neutral rating and $35 price target on Penn shares and keeps a Buy rating and $38 price target on DraftKings.
August 9th: Citi analyst Jason Bazinet raised the firm's price target on DraftKings to $41 from $30 and keeps a Buy rating on the shares. The analyst rolled forward the stock's valuation from 2023 to 2024 post the Q2 report. The firm continues to view DraftKings as one of the leading operators in the rapidly growing U.S. betting market.
August 8th: JPMorgan analyst Joseph Greff upgraded DraftKings (DKNG) to Neutral from Underweight with an unchanged price target of $26. The shares are down in response to Penn Entertainment's (PENN) agreement with ESPN, which is causing a negative reaction on increased potential competition and promotional pressure, the analyst tells investors in a research note. At current levels, the firm sees DraftKings' valuation as "more in balance" and believes a Neutral rating is more appropriate than an Underweight one. Still, the valuation is expensive, the firm contends.
August 8th: Morgan Stanley raised the firm's price target on DraftKings to $35 from $32 and keeps an Overweight rating on the shares. The firm is raising its FY23 and FY24 revenue estimates by 8% and 1%, respectively, while narrowing its FY23 EBITDAR loss by about 90% to reflect DraftKings' Q2 beat, flowing through the operating structure to future windows with higher hold.
August 8th: As previously reported, Truist analyst Barry Jonas upgraded DraftKings to Buy from Hold with a price target of $44, up from $31. The analyst cites the company's inflection to profitability in Q2 as the management navigated around numerous early threats, and the path to "significant and sustainable" profitability has become clearer, the analyst tells investors in a research note. DraftKings may be the "best top-line story in gaming today", even though the sector has been constrained by macro concerns, the firm adds.
August 7th: Deutsche Bank analyst Carlo Santarelli raised the firm's price target on DraftKings to $27 from $24 and keeps a Hold rating on the shares. The company reported "strong" Q2 results and guidance, but the outlook is tougher from here, the analyst tells investors in a research note.
August 7th: Craig-Hallum raised the firm's price target on DraftKings to $40 from $35 and keeps a Buy rating on the shares. Despite high expectations into the print, DraftKings didn't disappoint, the firm says. Craig-Hallum's call remains the same as last quarter - the company and stock have momentum, and it thinks both continue. DraftKings is taking market share at an accelerated rate and flowing more of that through to the bottom line with an added focus on cost efficiencies, which was highlighted by its first quarter of positive adjusted EBITDA, the firm adds.
August 7th: Roth MKM raised the firm's price target on DraftKings to $23 from $20 but keeps a Sell rating on the shares. The company is benefiting from a lull in competition after non-FanDuel competitors reduced customer acquisition efforts since the second half of last year, but the firm also sees little prospects for meaningful state launches and difficult market share comps in the second half of 2023, the analyst tells investors in a research note.
August 7th: Stifel analyst Jeffrey Stantial raised the firm's price target on DraftKings to $33 from $32 and keeps a Hold rating on the shares after the company reported what the firm describes as "another impressive mostly product-driven beat & raise." Based on commentary on the call, the firm can envision "similar upside drivers persisting" into the second half, though potentially decelerating in scale as DraftKings laps comparatively tougher football comps and as competitors work to catch up on product, the analyst tells investors.
August 7th: Susquehanna analyst Joseph Stauff raised the firm's price target on DraftKings to $40 from $39 and keeps a Positive rating on the shares. The firm said investors are now focused on potential momentum in the new sports calendar.
August 7th: Susquehanna analyst Joseph Stauff raised the firm's price target on DraftKings to $40 from $39 and keeps a Positive rating on the shares. The firm said investors are now focused on potential momentum in the new sports calendar.
August 7th: JMP Securities analyst Jordan Bender raised the firm's price target on DraftKings to $39 from $33 and keeps an Outperform rating on the shares. DraftKings' Q2 was its first EBITDA positive quarter as a public company, and its results and financial outlook are "night and day" from last year, the analyst tells investors in a research note. The firm views updated guidance as conservative.
August 6th: Jefferies raised the firm's price target on DraftKings to $42 from $38 and keeps a Buy rating on the shares. The continued revenue and earnings acceleration suggest that further upside in the shares remains, the firm says. Most notable in support of this view is the increasing productivity in mature states, which continue to generate revenue and profit growth, Jefferies adds. With the highest volume NFL season forthcoming, the firm thinks the positive momentum in estimates and the shares continues.
August 4th: Craig-Hallum analyst Ryan Sigdahl raised the firm's price target on DraftKings to $40 from $35 and keeps a Buy rating on the shares. The company "didn't disappoint" despite high expectations going into the Q2 report, the analyst tells investors in a research note. The firm thinks the momentum in the shares can continue. DraftKings is taking market share at an accelerated rate and flowing more of that through to the bottom line with an added focus on cost efficiencies, says Craig-Hallum. It still believes DraftKings will be one of the few long-term winners in the sector and "highly profitable" in the long term.
August 4th: BTIG raised the firm's price target on DraftKings to $39 from $34 and keeps a Buy rating on the shares after its better than expected Q2 results. The business is scaling at a fast pace with over 1200bps of GGR share from last year thanks to strong player retention, improving per caps, and more of the product driving those advancements developed in-house, the analyst tells investors in a research note.
August 4th: Canaccord analyst Michael Graham raised the firm's price target on DraftKings to $42 from $38 and keeps a Buy rating on the shares. The firm said they reported very strong Q2 results, with revenue and profitability both well ahead of consensus as ongoing product improvements drove robust growth and further market share gains.
August 4th: Benchmark analyst Mike Hickey raised the firm's price target on DraftKings to $37 from $32 and keeps a Buy rating on the shares. DraftKings' Q2 performance, which "markedly" exceeded consensus forecasts on both revenues and AEBITDA, along with revised 2023 guidance that raised revenue predictions by $315M and AEBITDA by $110M, was "a grand slam" that firmly cements the company's place as "a front-runner in the digital sports entertainment and gaming industry," the analyst tells investors.
Technicals
DKNG got hit pretty hard this week on the ESPN/PENN news, dropping around 12.5% on Wednesday and Thursday although it bounced back on Friday, closing higher by 5.9%
If you’re trading the stock, I think you can own it as long as DKNG stays above the 50d sma/ema but personally I’d be worried about some analyst downgrades which could lead to a gap down below my stops. I think there are too many better stocks to trade right now, not worth taking the extra risks with DKNG.
As you can see DKNG is still 60% below the all time high although it’s certainly had a nice bounce off the 2022 lows. If DKNG pulls back this week you’d want to see a bounce off the VWAP from that all time high which is currently at $26.40
If you look at the long term chart on the log scale instead of the linear scale, you can see that DKNG got rejected last week at the trendline from all time high. If DKNG can get past this ESPN/PENN news, I’d be very interested in DKNG on a breakout through this downtrend line and the recent high of $35.50 but I’m not expecting that to happen anytime soon. I think DKNG is going to be stuck in the doghouse for a little while until investors can digest the recent news.
Conclusion
I like DKNG for the next 4-5 years but only if this new ESPN/PENN co-venture doesn’t impact DKNG but it’s hard to believe that it won’t so I’m going to stay on the sidelines for now. I’ve been impressed the past two quarters with DKNG’s significant improvement in the fundamentals and I was getting very close to starting a position but now I can’t because I’m worried that DKNG is going up against two goliaths now (FanDuel and ESPN/PENN) which will impact revenues and/or margins which means profitability might come later than expected and once it does come those profits will be smaller than previously forecasted.
I’ll definitely be paying close attention to DKNG, not only because I have friends that work at the company (and were early employees) but because I do think the sports betting market is intriguing and will continue to grow over the next decade as most states move to legalize because they want a piece of the tax revenues plus those politicians will face more pressure from constituents.
Even though I’m worried about ESPN/PENN, I’d still consider a DKNG position but the stock would need to get hammered (aka oversold), I’m thinking low $20s is where I’d get interested because I think at that price the risk of ESPN/PENN becoming a real competitor is already priced in (…but it’s not priced in at $29).
DKNG is down 14.5% from the recent high but that’s not enough of a pullback for me given the risk that DKNG won’t hit their guidance this year however I think the bigger risk is DKNG having to give soft guidance for 2024 plus it’s possible the recession that was supposed to happen this year ends up happening next year.
I’m very curious to see how this plays out and who ends up being the big winner over the next decade… this is now a 3-horse race and even though DraftKings and FanDuel’s are the legacy platforms, ESPN/PENN will put up a good fight.
Additional Sources
Management – https://www.draftkings.com/about/who-we-are/
Board of Directors – https://draftkings.gcs-web.com/governance/board-of-directors
Ownership – https://www.sec.gov/Archives/edgar/data/1883685/000110465923036644/tm239801d2_def14a.htm#tSOOC
Have a great week!!!!
~Jonah
Disclaimer: The stocks mentioned in this newsletter are not intended to be construed as buy recommendations and should not be interpreted as investment advice. Many of the stocks mentioned in my newsletter have smaller market capitalizations and therefore can be more volatile and should be considered more risky. I encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizes in accordance with your own risk tolerance and investment objectives.