On February 18, sports betting giant DraftKings Inc. (NASDAQ: DKNG) issued 4Q 2021 earnings results, as well as full-year 2022 revenue and cash flow guidance, that investors considered extremely disappointing. The stock fell plummeted US$4.77 or 22%, to US$17.29 after the results.
Specifically, the company reported fourth quarter 2021 revenue and adjusted EBITDA of US$473 million and a loss of US$128 million, respectively, versus year-ago figures of US$322 million and a loss of US$88 million.
Probably the most disappointing aspect of the report was the company’s forecast that its full-year 2022 adjusted EBITDA loss will widen to a range of US$825 million to US$925 million from a loss of US$676 million in 2021, even as DraftKings’ 2022 revenue increases ~50% to US$1.85 billion-US$2.0 billion. This points to the need for continued heavy sales and marketing expenses required in 2022 to gain and keep customers, and, more succinctly, raises the troubling question whether such outsized expenses will be necessary for the foreseeable future.
| (in thousands of U.S. dollars, except for shares outstanding) | Full Year 2022E | Full Year 2021 | 4Q 2021 | 3Q 2021 | 2Q 2021 |
| Average Monthly Unique Payers (MUPs) | 1,494,000 | 1,971,000 | 1,340,000 | 1,123,000 | |
| Average Revenue Per MUP, in US dollars | $67 | $77 | $47 | $80 | |
| Revenue (A) | $1,925,000 | $1,296,025 | $473,325 | $212,819 | $297,605 |
| Sales and Marketing Expense | $981,500 | $278,444 | $303,658 | $170,712 | |
| as a % of Revenue | 76% | 59% | 143% | 57% | |
| Adjusted EBITDA | ($875,000) | ($676,133) | ($127,966) | ($313,658) | ($95,302) |
| Adjusted EBITDA Margin | -45% | -52% | -27% | -147% | -32% |
| Operating Income | ($1,561,617) | ($368,756) | ($546,516) | ($321,554) | |
| Operating Cash Flow | ($419,508) | ($172,247) | ($70,886) | ($98,624) | |
| Cash | $2,152,892 | $2,152,892 | $2,394,985 | $2,646,500 | |
| Debt (primarily Convertible) | $1,318,607 | $1,318,607 | $1,247,785 | $1,324,442 | |
| Fully Diluted Shares Outstanding (Millions) | 429.4 | 429.4 | 433.1 | 430.3 |
In 2021, these promotional costs totaled a staggering US$981.5 million, or 76% of revenue. Based on management’s projections, that extremely high percentage seems unlikely to decline markedly, if at all, in 2022. In broad terms, the cost to acquire an online gaming customer is proving to be enormous, perhaps US$300-US$500 according to industry analysts. Indeed, DraftKings and rival FanDuel often offer credits of up to US$1,000 to new customers. To complicate matters, even after incurring these large upfront costs, online gambling companies do not really know how loyal their customers will be.
This issue has made valuing DraftKings a tricky exercise. At its current share price, DraftKings’ stock market capitalization is around US$7.0 billion, and, after factoring in its net cash position of about US$0.8 billion, the company’s enterprise value (EV) is roughly US$6.2 billion. Based on management’s 2022 revenue guidance, this implies DraftKings trades at an EV-to-2022E revenue multiple of about 3.2x, fairly low for a growth company.
However, the company’s valuation on the basis of cash flows is more problematic. It is difficult to determine the appropriate value for a company which could potentially generate a US$875 million adjusted EBITDA loss in 2022 and could incur further substantial losses for some time to come because of large required promotional spending. If that spending were cut back noticeably, revenue may decline quite rapidly too.
In its 4Q 2021 earnings release, DraftKings said that its adjusted EBITDA could turn positive in 4Q 2023 but provided no real justification for how that could be achieved. So far, investors are not buying into that projection.
While in different businesses, DraftKings’ business model — and future prospects — may be quite similar to that of the fitness equipment manufacturer Peloton Interactive, Inc. (NASDAQ: PTON). Peloton’s revenue is also growing, but, like DraftKings, it too must maintain very high sales and marketing spending levels to attain its revenue target. Furthermore, it is unclear if the combination of impressive revenue growth at either company, offset by large required marketing expenses, will ever translate into predictable and steady positive cash flow generation.
Many analysts have pronounced that determining the fair value for Peloton is quite difficult given all the uncertainties it faces. In light of DraftKings’ 2022 financial projections, the same statement unfortunately seems to hold for the online betting giant.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
