On Friday, DraftKings Inc. (NASDAQ: DKNG) reported 1Q 2022 earnings. Revenue grew 34% on a year-over-year basis, although it was down sequentially from 4Q 2021. DraftKing’s quarterly adjusted EBITDA loss expanded to about US$290 million as the company continued to boost marketing expenses needed to acquire new customers.
While the friendlier stock market of 2H 2020 and the first three quarters of 2021 may have accepted these results; however, the current much more skeptical market sold the stock off 9% on May 6 and a further 13% on May 9, bringing its cumulative decline to around 80% over the last eight months.
DraftKings raised its full-year 2022 revenue guidance by US$50 million to US$1.925 to US$2.025 billion and improved its adjusted 2022 EBITDA loss forecast to (US$760) to (US$840) million from a loss range of (US$825-US$925) million.
|(in thousands of U.S. dollars, except for shares outstanding)||Full Year 2022E||Year Ended 3-31-22||1Q 2022||4Q 2021||3Q 2021|
|Average Monthly Unique Payers (MUPs)||2,000,000||1,971,000||1,340,000|
|Average Revenue Per MUP, in US dollars||$67||$77||$47|
|Sales and Marketing Expense||$1,074,266||$321,452||$278,444||$303,658|
|as a % of Revenue||77%||77%||59%||143%|
|Adjusted EBITDA (A)||($800,000)||($826,435)||($289,509)||($127,966)||($313,658)|
|Adjusted EBITDA Margin||-41%||-59%||-69%||-27%||-147%|
|Operating Cash Flow||($356,718)||($172,247)||($70,886)|
|Cash – Period End||$1,772,892||$2,152,892||$2,394,985|
|Debt (primarily Convertible) – Period End||$1,316,474||$1,318,607||$1,247,785|
|Fully Diluted Shares Outstanding (Millions)||435.3||429.4||433.1|
The culprit in all this: the need for continued heavy sales and marketing expenses required to gain and keep customers. Remarkably, for the twelve months ended March 31, 2022, DraftKings has incurred more than US$1.07 billion of such costs, equivalent to 77% of its revenue over that period.
The troubling issue is that in the extremely competitive online gambling industry, maintaining an extraordinarily high level of promotional expenses seems to be required. Worse, those high outlays may have to be incurred for many years to come. 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.
At its current share price, DraftKings’ stock market capitalization is around US$5.0 billion, and, after factoring in its net cash position of about US$0.5 billion, the company’s enterprise value (EV) is roughly US$5.5 billion. Based on management’s 2022 revenue guidance, this implies DraftKings trades at an EV-to-2022E revenue multiple of about 2.7x, quite low for a growth company.
However, the company’s valuation on the basis of cash flow is more problematic. It is difficult to determine the appropriate value for a company which, even after management’s recently improved cash flow guidance, could potentially generate a US$800 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.
Another point of concern: 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). The company did not reiterate any such claims in its 1Q 2022 earnings release.
DraftKings is a major player in the high-profile and growing business of online gambling. However, investors are growing more skeptical, almost by the day, that profitability can be achieved within a reasonable timeframe.
DraftKings Inc. last traded at US$11.50 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.