As a sign of the froth in the stock market, last week DraftKings Inc. (NASDAQ: DKNG), a U.S. online betting company with an annualized revenue run rate of about US$1.2 billion and an annualized EBITDA loss rate of ~US$380 million, reportedly bid US$22 billion for the British gambling firm Entain plc. This bid for Entain represented a 100% increase to a proposal made by MGM Resorts International just eight months ago.
Online sports gambling is a very popular investment sector with solid growth prospects, and DraftKings is one of the few publicly traded ways to play the sector. Indeed, the consulting firm Market Research Future estimates that the global online sports betting market could reach nearly US$60 billion in 2026, up from around US$25 billion in 2019, equivalent to a compounded annual growth rate of 13-14%.
However, there are many established, deep-pocketed competitors in this space, and DraftKings’ valuation looks quite stretched even in the context of a sector experiencing solid growth.
DraftKings’ revenue is projected to grow rapidly. Consensus analysts’ estimates according to Capital IQ call for 2021 revenue to reach around US$1.3 billion and for 2022 revenues of about US$1.7 billion, representing year-over-year growth of about 30%.
However, the company’s top-line growth has thus far translated only into large adjusted EBITDA losses. This shortfall was US$95 million in 2Q 2021, a US$380 million annualized run rate.
| (in thousands of U.S. dollars, except for shares outstanding) | 2Q 2021 | 1Q 2021 | 4Q 2020 | 3Q 2020 | 2Q 2020 |
| Revenue | $297,605 | $312,276 | $322,223 | $132,836 | $74,998 |
| Adjusted EBITDA | ($95,302) | ($139,262) | ($87,884) | ($197,079) | ($59,817) |
| Adjusted EBITDA Margin | -32% | -45% | -27% | -148% | -80% |
| Operating Income | ($321,554) | ($153,108) | ($268,338) | ($348,357) | ($324,791) |
| Operating Cash Flow | ($98,624) | ($77,751) | ($96,584) | ($106,320) | ($134,971) |
| Cash | $2,646,500 | $2,818,128 | $1,817,258 | $1,140,907 | $1,244,266 |
| Debt | $1,324,442 | $1,327,294 | $81,612 | $0 | $0 |
| Fully Dil. Shrs. Out. (Millions) | 430.3 | 429.0 | 427.8 | 425.4 | 392.8 |
DraftKings’ enterprise value (EV) is around US$20 billion which implies that its EV-to-2022E revenue ratio is nearly 12x, a huge multiple for any growth company. The multiple is especially noteworthy given the company’s substantial EBITDA deficits.
Entain, a company with a larger revenue base than DraftKings, trades at a significantly cheaper valuation multiple. It had US$2.4 billion of revenue in the first half of 2021, which implies that DraftKings’ takeover bid for Entain is at about a 5x revenue multiple. Unlike DraftKings, Entain currently generates positive EBITDA; its EBITDA in the first half of 2021 was around US$550 million. As a result, if DraftKings were to acquire Entain at around its current bid, the transaction would be accretive for DraftKings – only because Entain’s positive EBITDA would help to offset DraftKings’ substantial EBITDA losses.
A complication in DraftKing’s bid for Entain is that Entain and MGM are 50/50 joint venture partners in BetMGM. Any deal that would result in Entain’s being a competitor to MGM in the U.S. would likely require MGM’s consent. As a consequence, a condition of a DraftKings-Entain merger could be a requirement that DraftKings divest the BetMGM stake.
A larger issue is the difficulty in squaring DraftKings’ current enterprise value (~US$20 billion) with its reported bid for Entain (US$22 billion). Admittedly, the two companies’ online gambling strategies are somewhat different: DraftKings focuses on fantasy sports, while Entail is a more traditional bookmaker. However, it is puzzling why, at around the same enterprise values, DraftKings has much smaller revenue and is far less profitable than Entain.
DraftKings Inc. last traded at US$50.56 on the NASDAQ.
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.
