DraftKings talks big, persuades few; Rancor in Richmond

DraftKings divided analysts with its 3Q21 earnings report. Credit Suisse pundit Ben Chaiken said the company was “moving the ball down the field.” That’s despite revenues of $212 million that well undershot Wall Street‘s expected $238 million, rather like a downfield pass that was picked off for an interception. Chaiken blamed the shortfall on low hold on NFL games and an upswing in marketing costs. DraftKings predicts it will bring in $1.7 billion to $1.9 billion next year, not including money from states that have yet to add sports betting. The Street’s consensus is it will be $1.8 billion inclusive of new markets. Chaiken thinks that DKNG will next try to buy or build a media component, as “the next major theme in sports betting will be the emphasis on sports media, which can be used to more efficiently acquire and retain customers.” If a deal can’t be struck with ESPN, look for a purchase of The Athletic.

Writes Chaiken, “Essentially, we think that having data on the content your customers engage in, duration, and time of day they consume, can help sports betting companies more accurately fine tune there acquisition and retention strategy. We don’t think the market appreciates this dynamic, and that for those that can get the sports media angle right, it will be a definitive competitive advantage.” Still, he kept his price target at $85/share.

Deutsche Bank analyst Carlo Santarelli was more bearish, lowering his price target by five dollars (from an already-conservative $51), writing that the results were “a touch disappointing, at a surface level.” After various losses, like the cost of launching in Arizona, were taken into account, “results were more or less in line.” (Despite losing $15 million in Arizona, DKNG claimed it was “ahead of expectations.”) Negative ROI projections “are a bit more concerning, as it implies, to a degree, that DKNG is consistently having to spend more than expected to drive the guided revenue results.” Management is banking on launches in Louisiana (ongoing), New York State, Maryland and Ontario to brighten the picture. The Golden Nugget Online takeover is expected to close early next year but DraftKings isn’t modeling it in 2022’s numbers, which is unwontedly conservative of them.

The bottom line of the DKNG call is that, as much money as the company is taking in, much more is going out to acquire customers. Santarelli noted that the $314 million negative ROI well exceeded Deutsche Bank’s forecast of $271 million. (Whatever the number, this is not a game for the faint of heart or thin of wallet.) Also, while DraftKings’ hold percentage wasn’t disclosed, if the industry standard is 6.5% it must be awfully loose. For a silver lining, the company expects to save $300 million from the Golden Nugget absorption, whether in job cuts or cheaper access to Golden Nugget retail sports books, to say nothing of newly acquired players. And if DraftKings gets tapped for New York State (a lead-pipe cinch) “there are a lot of levers to pull to try and become profitable, such as pulling back on promotions and marketing.” That’d be a change.

One analyst keeping his powder dry was JP Morgan‘s Joseph Greff, who stood pat with a $49 price target and “neutral” rating. His reason was “a premium valuation amid an increasingly competitive OSB/iGaming environment (3Q21 to wit) … we see better value elsewhere in our coverage universe until we gain more confidence in DKNG’s path to narrowing EBITDA losses.” According to Greff’s synopsis, DraftKings’ excuse for the poor quarterly performance was—we paraphrase—that they’re lousy oddsmakers: “number of overs hit in in NFL primetime and no NFL underdog upsets.” Revenue growth also slowed dramatically, from 271% in the second quarter to 60%. Greff discounted a 31% decline in unique players as “reflective of its expansion into new states.” Online market share increased 33% in September although that may not count for much when you’re getting your ass kicked by your customers. Internet gambling market share eked up a bit, too.

DraftKings wouldn’t say as much but it needs $437 million revenue in this quarter to make its projections pencil out. What it would discuss was the abortive Entain caper, with whom DKNG “was in early discussions … as a means to explore global growth and product opportunities and that value was a factor it walked away; deal complexity was only a smaller part of its ultimate decision not to engage.” No word on whether they’ll be back for a second bite of the apple.

Like Greff, Truist Securities analyst Barry Jonas was staying on the sidelines: “We see management remaining diligent in carrying out their long-term growth strategy with profitability to come as the market matures (2-3 year timeline per state). While we think DKNG is likely a long-term winner, for now we favor stocks with wider valuation dislocations.” He also shaved $5 off his price target (to $50). Management argued that things would get better, thanks to “potential upside if the Interactive [total addressable market] is larger than expected, a deeper amount of legalization and/or global and product expansion [occurs].” That’s a lot of ‘ifs.’

More tangibly, The GOAT saved some of DraftKings’ fourth-quarter bacon, with the Tampa Bay Buccaneers/New England Patriots tilt spearheading DKNG’s highest-grossing day ever. Similarly, a one-game playoff between the Boston Red Sox and the New York Yankees generated the highest MLB handle in DraftKings history by some 12%. On the downside, the company is not booking any new state-level betting launches for the rest of the year, and claims to “engage and acquire customers efficiently.” That’s a good one. Jonas chronicled a number of subtleties working in DKNG’s favor, such as the popularity of its DraftKings Rocket i-casino game but Wall Street’s guarded attitude toward the company’s larger business model is easy to understand.

Sheldon Adelson‘s $30 billion fortune is not going to waste. Widow Dr. Miriam Adelson has assumed the role of kingmaker and is auditioning GOP candidates with an eye to the next two election cycles. Mrs. Adelson’s checkbook sat shiva for a long time after Sheldon’s demise, in keeping with Jewish traditions of mourning, but it’s open for business now. What Politico describes as “ring-kissing” involves players across a wide Republican spectrum, from Mike Pence to Sen. Ted Cruz and beyond. Dr. Adelson has made some disastrous political bets in the recent past, whether on Donald Trump or in the naive expectation that she could buy the Texas Lege. (No sale.) She’s also a major proponent of the failed War on Drugs which, considering that she made her name off drug rehab, colors her a rank hypocrite. (Her late husband got so addicted to pain killers that the missus had to put him on methadone, formerly prescribed for heroin junkies.) It’s a measure of Dr. Adelson’s clout that Trump is now openly sucking up to her. (She’s covering her bet by keeping lines of communication open to Sen. Mitch McConnell.) It must be quite a warm fuzzy to have an entire political party at your feet.

Richmond City Councilman Mike Jones is still stewing over the surprise defeat of the Urban One casino last week. “I’m really concerned with the fact that every neighborhood every precinct in the First, the Second, the Third District, they can walk their streets, they have the infrastructure, we don’t have those things … I am for the democratic process. That’s what I voted for on council, to send it to the referendum and let the citizens of Richmond decide. But it’s interesting to see a breakdown along racial and neighborhood lines.” Mayor Levar Stoney, who lost political capital last Tuesday, was magnanimous in defeat: “From the beginning, we said the people would decide. They have spoken, and we must respect their decision.”

Jottings: TheLines.com has the Las Vegas Raiders 2.5-point underdogs at home against the Kansas City Chiefs. But with the Chiefs offense sputtering and the Raiders coming off a trap-game loss to the lowly New York Giants anything seems possible (the over/under is the highest of the week: 52.5) … Deutsche Bank‘s Carlo Santarelli is going out on a limb and predicting the following gross gaming October results compared to 2019: Las Vegas Strip +24%, Las Vegas locals +41.5%, Louisiana flat, Ohio +22%, Missouri +9.5%, Indiana +16%. If the numbers look phat it’s partly because this October had two extra weekend days … Slot industry magnate Chuck Mathewson died last week at age 93. The father of the evergreen Wheel of Fortune slot, Mathewson is credited with building International Game Technology into one of Big Gaming’s giants … James Packer continues to deny knowledge of money laundering at Crown Resorts. He didn’t have to know. It was more lucrative that he remain ignorant … The Eastern Band of Cherokee Indians doesn’t think what’s good for their goose is good for someone else’s gander. The Lumbee Tribe is seeking federal recognition. That, the Cherokee fear, could mean yet another North Carolina casino. Free-market competition? Heaven forfend! … The American Gaming Association has extended President Bill Miller‘s contract by three years. And why not? With no disrespect to his predecessors, Miller has achieved more at the federal level than any AGA prexy before him.

Quote of the Day: “Some predicted that the Clean Indoor Air Act would hurt the bottom line of businesses, even forcing some to close. Conversely, there are more restaurants and bars licensed in Delaware now than when the Act went into effect. Delaware’s three slot-machine casinos have all experienced their highest revenue periods in the last two years.” —then-Gov. Ruth Ann Minner in 2006. Ms. Minner died over the weekend. S&G sends its condolences to her family.