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At just the exact time that everything seems to be playing out right for DraftKings (DKNG), its stock seems to be having an existential crisis. Investors have shunned DraftKings over the past year, and especially over the past few months. Yes, there have been fundamental reasons to point at (the usual – continued losses, as well as skepticism over DraftKings’ acquisition of Golden Nugget Online Gaming, a deal which I view as extending DraftKings’ diversification beyond sports), but the sharp drop in shares is largely due to weaker sentiment for tech and growth stocks than it is to anything else.
Over the past year, shares of DraftKings have lost approximately 55% of their value, and relative to highs above $70 notched in March of last year, DraftKings has shed more than two-thirds of its value. Since the start of 2022 alone, DraftKings has lost 16%, more than most other tech stocks.
While DraftKings appears to be a stock in free fall, the question investors have to ask is: at what point does the drop become overdone? While I agree that DraftKings had a lot of excess fat when it was trading above $70, we can’t make the same argument now.
In fact, at current share prices near $23, DraftKings has a market cap of just $9.98 billion, and after netting off the $2.39 billion of cash and $1.25 billion of debt on DraftKings’ most recent balance sheet, the company’s resulting enterprise value is $8.84 billion. For FY22, meanwhile, Wall Street analysts are expecting DraftKings to generate $1.88 billion in revenue, representing stellar 49% y/y growth.
Against this revenue estimate, DraftKings is trading at just a 5.2x EV/FY22 revenue multiple, the first time in recent memory that the stock has crossed below to a single-digit multiple of revenue, and unfitting for a company of its growth profile and its huge market opportunity.
There are plenty of recent fundamental catalysts, in my opinion, that can restoke enthusiasm for DraftKings. While sellers have pounced on DraftKings, I think the stock is long overdue for a rebound. The best move here is to hold your nose and dive in with a rebound position.
The biggest element of the bullish thesis for DraftKings revolves around new state launches. As investors who are newer to DraftKings may not be aware, while DraftKings’ fantasy sports platform is live and legal across most areas of the U.S., online sportsbooks are still regulated on a state-by-state basis.
Just recently in early January, online sports betting in New York State went live for the first time. New York, needless to say, is one of the most critical markets to expand into as the fourth-largest state in the U.S. (it got surpassed by Florida for third place during the pandemic).
Early data, as reported by Seeking Alpha, shows that New York sports betting is off to a strong start, with Bank of America estimating $667 million in total state revenue this year and $1.10 billion by 2025. (For sizing purposes: nationwide, DraftKings’ market share of online sportsbook handle is roughly ~33%).
Even more important than the near-term revenue opportunity, however, is the fact that a big bellwether like New York State finally legalizing online sports betting after years of debate might entice other large states to fold as well (California and Texas are both still holdouts).
Timing-wise, the New York launch is well-timed ahead of the Super Bowl, and could give us some upside surprises in this untested market this year.
Aside from New York specifically, there are two other sports betting data points that are important to share.
The first: as shown in the chart below, the speed of adoption in newly launched states has been slowly creeping upward. There has been a general thesis that there is “pent-up demand” for sports betting in states that have not yet legalized it, and that DraftKings can hit the ground running in these states because of how highly anticipated it is at the time of launch.
DraftKings state launch acceleration
DraftKings Q3 earnings deck
We didn’t have New York data yet as of DraftKings’ most recent quarterly update. However, for the other newly launched states in DraftKings’ portfolio, Wyoming’s active customers grew at a 1.6x pace relative to all the other states DraftKings has launched, while Arizona (the 14th largest state in the U.S. with a population of roughly 7.5 million) grew at a 3.3x pace. The Arizona statistic is especially impressive since DraftKings was not operating a DFS (daily fantasy sportsbook) service at the time in the state.
Unsurprisingly, DraftKings’ overall market share is also gaining. Overall share of online sportsbook handle has increased two points to 33% as of the end of September versus earlier in the summer, while share of gross gaming revenue (GGR) has also increased two points to 17%:
DraftKings market share gains
DraftKings Q3 earnings deck
And with all the success and recent news on the sportsbook side of the house, it’s easy to forget as well that DraftKings isn’t just aiming to become a sportsbook operator, but a general tech-enabled platform for all things gaming and fan-oriented.
Another recent endeavor of DraftKings that has gotten off to a strong start is DraftKings Marketplace. Building on the recent and sharp strength of NFTs, DraftKings quickly built out its own platform, offering sports-oriented memorabilia and NFTs.
DraftKings Marketplace
DraftKings Q3 earnings deck
The company notes that even non-sports-related NFTs, which it issued in partnership with movie studios like Lions Gate (LGF.A), sold out “within minutes”. The majority of offerings are oversubscribed, and DraftKings got off to a nice start with over $20 million in GMV in Q3.
I view recent pessimism on DraftKings as premature, especially with so many tailwinds for the company that provide a nice setup in 2022 – both sportsbook/legalization-related as well as non-sports-related, such as DraftKings’ recent entry into NFTs. Stay long here and use the dip as a buying opportunity.
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Disclosure: I/we have a beneficial long position in the shares of DKNG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
