$DKNG Solid Revenue Growth Will Eventually Lead to Profitability
On a YTD basis, DraftKings Inc. (Nasdaq: DKNG) is up nearly 145% due to a mix of solid financial results, raising its full-year guidance, and delivering its first quarter of adjusted EBITDA profitability in Q2. With that in mind, the company’s Q3 earnings report will drop on November 2nd where I expect it to beat analysts’ revenue and EPS estimates, all while raising its full-year guidance again. As is, the NFL season is underway which is a seasonal catalyst for the company since Football is the most popular sport for wagers. Now that the company has a clear path toward profitability, DKNG stock could be a smart buy ahead of its Q3 earnings.
DKNG Fundamentals
NFL Season Will Further Improve Performance
DraftKings has done a tremendous job this year growing its market share. According to data from last May, the online sportsbook dominated 32% of the market compared to 27.7% over the year prior. The significance of this growth is that it has been taking market share from its direct competitors.
The sportsbook’s biggest competitor is FanDuel which held a 45.1% market share back in May. That said, this figure represents a slight YoY decline from 45.5% which shows that DKNG is a growing force in this market. Other competitors also lost market share as BetMGM’s market share shrank from 11.1% to 9.9%, Caesars’ dropped from 6% to 5%, and Barstool’s declined from 2.6% to 1.9%.
What is more impressive is that DKNG was able to grow its market share at the same time its sales and marketing costs were declining. In Q2, the sportsbook’s sales and marketing costs decreased sequentially to $207.4 million from $389.1 million. At the same time, its revenues increased sequentially from $769.6 million to $874.9 million. The company achieving this feat is impressive considering the lack of highly followed sports events in Q2 except for the NBA playoffs.
With the NFL season underway, DKNG can continue growing its revenues at the same impressive rate due to the popularity of betting on the NFL. A recent survey by the American Gaming Association found that a record 73.5 million Americans plan to place bets on the NFL this season. This figure represents a nearly 60% increase from a year ago which shows how popular betting on the NFL is. As DraftKing holds the second-largest market share in online sports betting, it is safe to assume that a large number of these bettors will place their wagers through the company’s platform.
On that note, the first week of the NFL season indicates that the online sports betting industry may be in for a record season. GeoComply – a leading provider of location-based detection technology in the online sports betting industry – recorded 242.3 million geolocation transactions across regulated online sportsbook customers during week 1. This represents a 56% increase from the same period in 2022. Moreover, new research by the AGA found that the first week of the NFL saw 1.1 million new player accounts which is a 40% YoY increase.
The increase in sports betting volume can be due to 3 major markets experiencing their first start to the NFL season which are Maryland, Massachusetts, and Ohio. Across these markets, the new NFL season added 61 thousand new accounts in Maryland, 59 thousand in Massachusetts, as well as a staggering 133 thousand in Ohio.
In light of this, DKNG could stun Wall Street with a strong top-line and bottom-line beat considering that the NFL season started on September 7th. This means that the sportsbook received wagers on 49 games in Q3 spanning the first 3 weeks of the NFL season as well as week 4’s Thursday Night Football game.
Q3 Forecast
For its Q3 earnings, analysts expect DKNG to report revenue of $686.3 million and an EPS of -$0.69. That said, the online sportsbook may be poised to shatter these estimates as I’m forecasting its revenues to come at $924.9 million and its EPS to be -$0.53.
In the first 2 quarters of 2023, DKNG’s revenue increased YoY by 84.48% and 87.68%. As such, I’ve used the average YoY increase in the first 2 quarters to project its YoY revenue growth in Q3. Based on an 84.27% YoY increase, the sportsbook’s revenue would amount to $924.9 million.
Quarter Revenue YoY Growth
Q1 22 $417,205,000 33.60%
Q2 22 $466,185,000 56.65%
Q3 22 $501,938,000 135.85%
Q4 22 $855,133,000 80.67%
Q1 23 $769,652,000 84.48%
Q2 23 $874,927,000 87.68%
Q3 23 $924,940,032 84.27%
After projecting the company’s Q3 revenue, I expect its cost of revenue to be $583.2 million. In the Q2 earnings call, management raised its adjusted gross profit guidance from 42% – 45% to 43% – 45%. Considering that DKNG’s adjusted gross margin was 47% last quarter, I expect it to decline in Q3 in order to reach management’s expectations. As such, I used the average gross margin in Q1 and Q2 to reach the figure I’m projecting for the cost of revenue.
Quarter Revenue Cost of Revenue Gross Profit Gross Margin
Q1 23 $769,652,000 $521,740,000 $247,912,000 32.21%
Q2 23 $874,927,000 $510,323,000 $364,604,000 41.67%
Q3 23 $924,940,032 $583,251,338 $341,688,695 36.94%
As for sales and marketing expenses, there is an apparent trend in the company’s financials in the last 2 years of this cost increasing in Q3 compared to Q2. This spike could be due to the company increasing its marketing efforts ahead of the beginning of the NFL season. Based on this trend, I calculated the average Q3 QoQ growth rate in sales and marketing expenses which is 70.3%. At this rate, DKNG’s Q3 sales and marketing expenses would be $353.5 million.
Quarter Sales & Marketing QoQ Growth
Q1 21 $228,686,000
Q2 21 $170,712,000
Q3 21 $303,658,000 77.88%
Q4 21 $278,444,000
Q1 22 $321,452,000
Q2 22 $197,529,000
Q3 22 $321,714,000 62.87%
Q4 22 $345,282,000
Q1 23 $389,133,000
Q2 23 $207,487,000
Q3 23 $353,502,460 70.37%
Looking at the sportsbook’s product and technology costs, we can also find a pattern as the largest QoQ increase occurs in Q1 and is followed by smaller increases. Through this pattern, I calculated the average Q3 QoQ growth rate using data from the last 2 years to reach a projected Q3 growth rate of 1.48%. This would amount to $91.2 million in product and technology expenses.
Quarter Product & Tech QoQ Change
Q1 21 $56,159,000
Q2 21 $62,635,000 11.53%
Q3 21 $65,222,000 4.13%
Q4 21 $69,639,000 6.77%
Q1 22 $81,352,000 16.82%
Q2 22 $77,202,000 -5.10%
Q3 22 $76,299,000 -1.17%
Q4 22 $83,394,000 9.30%
Q1 23 $88,088,000 5.63%
Q2 23 $89,906,000 2.06%
Q3 23 $91,236,887 1.48%
The last operating expense remaining on DKNG’s income statement is G&A expense. This expense has been declining YoY since Q2 2022. With that in mind, these declines have been at a higher pace since Q4 2022. Therefore, I used the average YoY growth for the first 2 quarters of the year since they are better indicators of the company’s current performance. This means that I’m projecting G&A expense to decline 26.64% in Q3 which would amount to $136.6 million.
Quarter G&A YoY Growth
Q1 21 $168,997,000
Q2 21 $198,806,000
Q3 21 $219,706,000
Q4 21 $240,816,000
Q1 22 $216,606,000 28.17%
Q2 22 $187,609,000 -5.63%
Q3 22 $186,261,000 -15.22%
Q4 22 $173,244,000 -28.06%
Q1 23 $160,476,000 -25.91%
Q2 23 $136,256,000 -27.37%
Q3 23 $136,635,702 -26.64%
By subtracting these costs from the projected revenue of $924.9 million, we can estimate DKNG’s operating loss to be around $239.6 million.
Revenue $924,940,032
Cost of Revenue $583,251,338
Sales & Marketing $353,502,460
Product & Tech $91,236,887
G&A $136,635,702
Operating Loss -$239,686,354
For the rest of DKNG’s expenses, I used the average of the first 2 quarters given that they are better indicators of the company’s position at the moment. In this way, I’m projecting net interest income, remeasurement of warrant liabilities, other income, income tax provisions, and equity method investments to be $11.9 million, $18.5 million, $32 thousand, $1 million, and $221 thousand, respectively.
Quarter Net Interest Remeasure. of Warrant Liab. Other Income/Expense Income Tax Equity Method Inv.
Q1 23 $11,140,000 -$17,035,000 $19,000 $1,368,000 $119,000
Q2 23 $12,745,000 -$20,041,000 $45,000 $651,000 $323,000
Q3 23 $11,942,500 -$18,538,000 $32,000 $1,009,500 $221,000
Adding all of these figures together, we can reach my estimate for DKNG’s Q3 net loss of $247.4 million. With more than 463.9 million shares outstanding, this would amount to an EPS of -$0.533 – less than analysts’ estimate of -$0.699.
Revenue $924,940,032
Cost of Revenue $583,251,338
Sales & Marketing $353,502,460
Product & Tech $91,236,887
G&A $136,635,702
Operating Loss -$239,686,354
Net Interest Income $11,942,500
Remeasure. of Warrant Liab. -$18,538,000
Other Income $32,000
Income Tax $1,009,500
Equity Method Inv. $221,000
Net Loss -$247,480,354
OS 463,974,787
EPS -$0.533
Risks
While DKNG’s stock outlook appears to be bullish, there is a risk to the bull thesis. With interest rates at multi-decade highs, analysts expect consumer spending to slow down due to several factors including the resumption of student loan repayments, dwindling savings accounts, and banks tightening their lending standards. As such, bettors may reduce their wages in order to save funds which would impact DKNG’s revenue growth.
Technical Analysis
Looking at the hourly chart, DKNG stock is in a bearish trend with the stock trading in a downward channel. Looking at the indicators, the stock is below the 200 and 50 MAs which is a bearish sign, however, it recently broke through the 21 MA which could be an indication of a reversal soon. Meanwhile, the RSI is neutral at 49 and the MACD recently had a bearish crossover.
As for the fundamentals, DKNG is set to share its Q3 financial results today, November 2nd, after market close. Considering the success of the early weeks of the NFL season whose impact should be reflected in Q3, the sportsbook may be on track to deliver a strong earnings beat while raising its full-year guidance. With the stock trading near support, bullish investors could find the current PPS a lucrative entry point.
DKNG Forecast
While DKNG stock being up nearly 150% YTD may lead some to believe that it’s overvalued, this is farther from the truth. The online sportsbook has been performing exceptionally so far this year as seen by its declining costs and growing revenues. With the company releasing its Q3 earnings on November 2nd, I expect it to beat analysts’ estimates for revenue and EPS for the fourth consecutive quarter while raising its full-year guidance due to the anticipated revenue growth. This growth will be mainly driven by the NFL season which is the most popular sport for bettors. With a clear path toward profitability due to revenue growth and more efficient cost management, DKNG stock could be a profitable long-term investment.
DKNG Fundamentals
NFL Season Will Further Improve Performance
DraftKings has done a tremendous job this year growing its market share. According to data from last May, the online sportsbook dominated 32% of the market compared to 27.7% over the year prior. The significance of this growth is that it has been taking market share from its direct competitors.
The sportsbook’s biggest competitor is FanDuel which held a 45.1% market share back in May. That said, this figure represents a slight YoY decline from 45.5% which shows that DKNG is a growing force in this market. Other competitors also lost market share as BetMGM’s market share shrank from 11.1% to 9.9%, Caesars’ dropped from 6% to 5%, and Barstool’s declined from 2.6% to 1.9%.
What is more impressive is that DKNG was able to grow its market share at the same time its sales and marketing costs were declining. In Q2, the sportsbook’s sales and marketing costs decreased sequentially to $207.4 million from $389.1 million. At the same time, its revenues increased sequentially from $769.6 million to $874.9 million. The company achieving this feat is impressive considering the lack of highly followed sports events in Q2 except for the NBA playoffs.
With the NFL season underway, DKNG can continue growing its revenues at the same impressive rate due to the popularity of betting on the NFL. A recent survey by the American Gaming Association found that a record 73.5 million Americans plan to place bets on the NFL this season. This figure represents a nearly 60% increase from a year ago which shows how popular betting on the NFL is. As DraftKing holds the second-largest market share in online sports betting, it is safe to assume that a large number of these bettors will place their wagers through the company’s platform.
On that note, the first week of the NFL season indicates that the online sports betting industry may be in for a record season. GeoComply – a leading provider of location-based detection technology in the online sports betting industry – recorded 242.3 million geolocation transactions across regulated online sportsbook customers during week 1. This represents a 56% increase from the same period in 2022. Moreover, new research by the AGA found that the first week of the NFL saw 1.1 million new player accounts which is a 40% YoY increase.
The increase in sports betting volume can be due to 3 major markets experiencing their first start to the NFL season which are Maryland, Massachusetts, and Ohio. Across these markets, the new NFL season added 61 thousand new accounts in Maryland, 59 thousand in Massachusetts, as well as a staggering 133 thousand in Ohio.
In light of this, DKNG could stun Wall Street with a strong top-line and bottom-line beat considering that the NFL season started on September 7th. This means that the sportsbook received wagers on 49 games in Q3 spanning the first 3 weeks of the NFL season as well as week 4’s Thursday Night Football game.
Q3 Forecast
For its Q3 earnings, analysts expect DKNG to report revenue of $686.3 million and an EPS of -$0.69. That said, the online sportsbook may be poised to shatter these estimates as I’m forecasting its revenues to come at $924.9 million and its EPS to be -$0.53.
In the first 2 quarters of 2023, DKNG’s revenue increased YoY by 84.48% and 87.68%. As such, I’ve used the average YoY increase in the first 2 quarters to project its YoY revenue growth in Q3. Based on an 84.27% YoY increase, the sportsbook’s revenue would amount to $924.9 million.
Quarter Revenue YoY Growth
Q1 22 $417,205,000 33.60%
Q2 22 $466,185,000 56.65%
Q3 22 $501,938,000 135.85%
Q4 22 $855,133,000 80.67%
Q1 23 $769,652,000 84.48%
Q2 23 $874,927,000 87.68%
Q3 23 $924,940,032 84.27%
After projecting the company’s Q3 revenue, I expect its cost of revenue to be $583.2 million. In the Q2 earnings call, management raised its adjusted gross profit guidance from 42% – 45% to 43% – 45%. Considering that DKNG’s adjusted gross margin was 47% last quarter, I expect it to decline in Q3 in order to reach management’s expectations. As such, I used the average gross margin in Q1 and Q2 to reach the figure I’m projecting for the cost of revenue.
Quarter Revenue Cost of Revenue Gross Profit Gross Margin
Q1 23 $769,652,000 $521,740,000 $247,912,000 32.21%
Q2 23 $874,927,000 $510,323,000 $364,604,000 41.67%
Q3 23 $924,940,032 $583,251,338 $341,688,695 36.94%
As for sales and marketing expenses, there is an apparent trend in the company’s financials in the last 2 years of this cost increasing in Q3 compared to Q2. This spike could be due to the company increasing its marketing efforts ahead of the beginning of the NFL season. Based on this trend, I calculated the average Q3 QoQ growth rate in sales and marketing expenses which is 70.3%. At this rate, DKNG’s Q3 sales and marketing expenses would be $353.5 million.
Quarter Sales & Marketing QoQ Growth
Q1 21 $228,686,000
Q2 21 $170,712,000
Q3 21 $303,658,000 77.88%
Q4 21 $278,444,000
Q1 22 $321,452,000
Q2 22 $197,529,000
Q3 22 $321,714,000 62.87%
Q4 22 $345,282,000
Q1 23 $389,133,000
Q2 23 $207,487,000
Q3 23 $353,502,460 70.37%
Looking at the sportsbook’s product and technology costs, we can also find a pattern as the largest QoQ increase occurs in Q1 and is followed by smaller increases. Through this pattern, I calculated the average Q3 QoQ growth rate using data from the last 2 years to reach a projected Q3 growth rate of 1.48%. This would amount to $91.2 million in product and technology expenses.
Quarter Product & Tech QoQ Change
Q1 21 $56,159,000
Q2 21 $62,635,000 11.53%
Q3 21 $65,222,000 4.13%
Q4 21 $69,639,000 6.77%
Q1 22 $81,352,000 16.82%
Q2 22 $77,202,000 -5.10%
Q3 22 $76,299,000 -1.17%
Q4 22 $83,394,000 9.30%
Q1 23 $88,088,000 5.63%
Q2 23 $89,906,000 2.06%
Q3 23 $91,236,887 1.48%
The last operating expense remaining on DKNG’s income statement is G&A expense. This expense has been declining YoY since Q2 2022. With that in mind, these declines have been at a higher pace since Q4 2022. Therefore, I used the average YoY growth for the first 2 quarters of the year since they are better indicators of the company’s current performance. This means that I’m projecting G&A expense to decline 26.64% in Q3 which would amount to $136.6 million.
Quarter G&A YoY Growth
Q1 21 $168,997,000
Q2 21 $198,806,000
Q3 21 $219,706,000
Q4 21 $240,816,000
Q1 22 $216,606,000 28.17%
Q2 22 $187,609,000 -5.63%
Q3 22 $186,261,000 -15.22%
Q4 22 $173,244,000 -28.06%
Q1 23 $160,476,000 -25.91%
Q2 23 $136,256,000 -27.37%
Q3 23 $136,635,702 -26.64%
By subtracting these costs from the projected revenue of $924.9 million, we can estimate DKNG’s operating loss to be around $239.6 million.
Revenue $924,940,032
Cost of Revenue $583,251,338
Sales & Marketing $353,502,460
Product & Tech $91,236,887
G&A $136,635,702
Operating Loss -$239,686,354
For the rest of DKNG’s expenses, I used the average of the first 2 quarters given that they are better indicators of the company’s position at the moment. In this way, I’m projecting net interest income, remeasurement of warrant liabilities, other income, income tax provisions, and equity method investments to be $11.9 million, $18.5 million, $32 thousand, $1 million, and $221 thousand, respectively.
Quarter Net Interest Remeasure. of Warrant Liab. Other Income/Expense Income Tax Equity Method Inv.
Q1 23 $11,140,000 -$17,035,000 $19,000 $1,368,000 $119,000
Q2 23 $12,745,000 -$20,041,000 $45,000 $651,000 $323,000
Q3 23 $11,942,500 -$18,538,000 $32,000 $1,009,500 $221,000
Adding all of these figures together, we can reach my estimate for DKNG’s Q3 net loss of $247.4 million. With more than 463.9 million shares outstanding, this would amount to an EPS of -$0.533 – less than analysts’ estimate of -$0.699.
Revenue $924,940,032
Cost of Revenue $583,251,338
Sales & Marketing $353,502,460
Product & Tech $91,236,887
G&A $136,635,702
Operating Loss -$239,686,354
Net Interest Income $11,942,500
Remeasure. of Warrant Liab. -$18,538,000
Other Income $32,000
Income Tax $1,009,500
Equity Method Inv. $221,000
Net Loss -$247,480,354
OS 463,974,787
EPS -$0.533
Risks
While DKNG’s stock outlook appears to be bullish, there is a risk to the bull thesis. With interest rates at multi-decade highs, analysts expect consumer spending to slow down due to several factors including the resumption of student loan repayments, dwindling savings accounts, and banks tightening their lending standards. As such, bettors may reduce their wages in order to save funds which would impact DKNG’s revenue growth.
Technical Analysis
Looking at the hourly chart, DKNG stock is in a bearish trend with the stock trading in a downward channel. Looking at the indicators, the stock is below the 200 and 50 MAs which is a bearish sign, however, it recently broke through the 21 MA which could be an indication of a reversal soon. Meanwhile, the RSI is neutral at 49 and the MACD recently had a bearish crossover.
As for the fundamentals, DKNG is set to share its Q3 financial results today, November 2nd, after market close. Considering the success of the early weeks of the NFL season whose impact should be reflected in Q3, the sportsbook may be on track to deliver a strong earnings beat while raising its full-year guidance. With the stock trading near support, bullish investors could find the current PPS a lucrative entry point.
DKNG Forecast
While DKNG stock being up nearly 150% YTD may lead some to believe that it’s overvalued, this is farther from the truth. The online sportsbook has been performing exceptionally so far this year as seen by its declining costs and growing revenues. With the company releasing its Q3 earnings on November 2nd, I expect it to beat analysts’ estimates for revenue and EPS for the fourth consecutive quarter while raising its full-year guidance due to the anticipated revenue growth. This growth will be mainly driven by the NFL season which is the most popular sport for bettors. With a clear path toward profitability due to revenue growth and more efficient cost management, DKNG stock could be a profitable long-term investment.
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