DraftKings Smashes Analyst Expectations, Expects Positive EBITDA In 2024
DraftKings Inc. (NASDAQ: DKNG) reported 4Q 2022 results last night which bested analysts’ consensus estimates on all key metrics. In particular, the company’s quarterly revenues totaled US$855 million versus projections of US$799 million, and US$473 million in 4Q 2021. The progression in DraftKing’s adjusted EBITDA loss was similarly encouraging: negative US$50 million in 4Q 2022 compared with analysts’ estimates of around negative US$112 million, and a year-ago figure of negative US$128 million.
Furthermore, DraftKing’s adjusted EBITDA loss would have been only around negative US$25 million in the fourth quarter if launch costs in Maryland and Ohio are excluded. Those states allowed online sports gambling to commence on November 23, 2022 and January 1, 2023, respectively.
|(in thousands of U.S. dollars, except for shares outstanding)||Full Year 2023E||Full Year 2022||4Q 2022||3Q 2022||2Q 2022|
|Average Monthly Unique Payers (MUPs)||2,600,000||1,600,000||1,500,000|
|Average Revenue Per MUP, in US dollars||$109||$100||$103|
|Sales and Marketing Expense||$1,185,977||$345,282||$321,714||$197,529|
|as a % of Revenue||53%||40%||64%||42%|
|Adjusted EBITDA (A)||($400,000)||($721,781)||($49,927)||($246,211)||($118,134)|
|Adjusted EBITDA Margin||-14%||-32%||-6%||-49%||-25%|
|Operating Cash Flow||($625,519)||($148,458)||($132,229)||($172,585)|
|Cash – Period End||$1,309,172||$1,382,651||$1,514,371|
|Debt (primarily Convertible) – Period End||$1,324,688||$1,332,159||$1,333,668|
|Fully Diluted Shares Outstanding (Millions)||468.3||466.6||466.0|
The chief reason for the sequential improvement in DraftKing’s cash flow was its ability to boost revenue 70% from 3Q 2022 to 4Q 2022 while holding the quarter-over-quarter growth in sales and marketing costs (essentially promotional costs) to only 7% (US$345 million in 4Q 2022 versus US$322 million in 3Q 2022). Sales and marketing expenses comprised just 40% of 4Q 2022 revenue, down dramatically from 64% in 3Q 2022.
DraftKings expects continued improvement in 2023. Revenue this year should be US$2.85 to US$3.05 billion, up 32% at the midpoint from US$2.24 billion in 2022, and its 2023 adjusted EBITDA loss is projected to range from negative US$350 to negative US$450 million, about half of the full-year 2022 deficit of negative US$722 million. The company believes that 4Q 2023 and the full-year 2024 will both be adjusted EBITDA-positive periods.
The online sports gambling market is enormous and appears to be growing at a double-digit percentage rate. According to Custom Market Insights, the size of that market was around US$60 billion in 2021 and could reach US$145 billion by 2030. DraftKing’s spending to acquire and capture players represents an expensive strategy to gain market share, but if it can continue to gain share, it certainly is conceivable that its cash flows in future years could be quite significant.
Clearly, DraftKing’s results improved markedly in the fourth quarter, and it seems reasonable to expect strong growth to continue (absent a sharp economic downturn). The question for investors is the fair price to pay for that growth.
On the one hand, DraftKings is one of the many unprofitable, high-growth stocks which plummeted in 2022, but have soared so far in 2023. DraftKings stock has gained more than 50% over the first seven weeks of this year, but it is still far below its early September 2022 price of around US$60. Perhaps technical trading considerations will allow DraftKings stock to continue to gain ground.
On the other hand, DraftKings’ enterprise value is about US$8 billion, yet its adjusted EBITDA this year is expected to be a loss of around US$400 million. Valuing a fast-growing company which still generates such substantial negative cash flow is quite difficult.
DraftKings Inc. last traded at US$17.81 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.