Probably in reaction to a precipitous plunge in DKNG shares, DraftKings hosted an investor day in which it told Wall Street analysts that everything is coming up roses. Its lead point was that its ‘total addressable market’ (translation: potential bettors) is $26 billion, up from $22 billion a year, that Internet gambling is now worth $48 billion rather than last year’s $40 billion and that Canada is a $6 billion market. As Deutsche Bank analyst Carlo Santarelli discreetly pointed out, these figures are way out of whack with what online sports betting and i-gaming are actually realizing in terms of revenue. True, DraftKings has greatly increased its Internet-casino market share—especially in New Jersey—but by dint of purchasing Golden Nugget Online. Santarelli headlined his report, “If It’s All Like New Jersey; It’s All Good… We Doubt it Will Be.”
Santarelli opined, “nothing DKNG was going to do or say today was going to have a profound impact on shares. The bull/bear case around the stock is so wide, that making it wider, by raising TAM and adjusted EBITDA targets, wasn’t going to materially influence the believers or the skeptics.” One either believes in the DraftKings story, he said, or considers it “a long term pipe dream with too many unknowns.” Skeptics of last year’s projections were hardly likely to be convinced by this year’s upsized ones. DraftKings’ story, he continued, rests on two assumptions: That trends in New Jersey will be mirrored nationwide and that i-casino legalization will continue apace (a subject on which we become increasingly pessimistic).
Regarding the first point, Santarelli wrote that “From a big picture perspective,
DKNG is taking the state with the highest per adult sports betting spend, and spend that could have peaked in 2021, and assuming every other state gets to that level of spend, despite New Jersey being ahead of some of the comparable states by less than a year, while comparable per capita sports betting spend in New Jersey remains 2-4 times larger than most similar vintage states.”
As for i-casino legalization, he dismissed it as “a heavy lift” especially (we would add) in an election year. He concluded that DraftKings was likely “to remain volatile and we continued to believe it will act more like a trading stock than an investment … Given what we deem to be distant and lofty targets, though we acknowledge they are by no means contemplated in shares at current levels, there is little change in our view.”
Santarelli went on at length, picking holes in DraftKings’ revenue and market assumptions, but you get the idea. Barry Jonas of Truist Securities was more sympathetic, liking DraftKings as a long-term play, but retained his “hold” rating on the stock, under a headline that read, “Heavy Lies the Crown.” He reported that Jason Robins‘ boys predicted that within five years 65% of the U.S. population will have access to OSB and 30% to i-gaming. Robins expects to have 25% of the former and 22.5% of the latter. Accordingly, long-term revenue projections have been ratcheted up to anywhere from $5 billion to $7.3 billion.
Jonas observed that DraftKings’ market-size projections are far higher than his own and that Truist doesn’t expect the online market to mature until 2030. At least current market share looks healthy, with DraftKings reporting 32% of nationwide handle, 25% of OSB revenue and 19% of i-gaming revenue. Last quarter, “DKNG and two other operators accounted for 80%+ OSB GGR share in twelve states across the US vs. only three where they do not.” The company is currently profitable in the Garden State and in New Hampshire (where it enjoys a monopoly), West Virginia, Indiana, and Illinois, while it expects to be in the black this year in Pennsylvania, Connecticut, Colorado, Iowa and Oregon. We hope so, for investors’ sake.
Jottings: Bid farewell to Scientific Games and its familiar logo. It’s now Light & Wonder (ticker symbol LNW) and management lays forth the method behind the apparent madness of unloading the sports betting and lottery divisions, in favor of a more integrated company. We’re persuaded and LNW leaders appear prescient in having gotten out of sports betting … Following its acquisition of Maryland Live, REIT Gaming & Leisure Properties has folded two more Cordish Gaming casinos under its belt. These aren’t such hot performers but they came at a good price … By this time next year Penn National Gaming will have swallowed the remainder of Barstool Sports. Penn leadership argues that Barstool is a better value than its competitors when it comes to customer-acquisition costs and promotional outlays. See you next week, companeros.