DraftKings: Wynn Resorts’ Low Price Tag For Betting Business Poses A Problem
On January 23, 2022, the New York Post reported that Wynn Resorts, Limited (NASDAQ: WYNN) is attempting to divest its online sports betting business. Its asking price may be around US$500 million, which would represent just a fraction of the business’ reported value less than a year ago.
The reason for the about-face: heavy losses in both the near term and the foreseeable future. In its 3Q 2021 earnings call, Wynn said its sports betting app burned about US$100 million of cash during that quarter and is on track for a similar-sized cash flow shortfall in 4Q 2021. Based on that news, Morgan Stanley analysts placed a US$700 million value on the business.
In simple terms, the cost to acquire an online gaming customer is proving to be enormous, perhaps US$300-US$500, according to industry analysts. Indeed, sports betting giants DraftKings Inc. (NASDAQ: DKNG) and 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, or sticky, their customers will be.
A positive for the online gambling industry is the recent opening of the huge market in New York State. However, that market has a big catch: New York imposes an onerous 51% tax on gross gambling revenue, tied with tiny New Hampshire for the nation’s highest gambling tax rate. By comparison, the tax rates in neighboring New Jersey and Pennsylvania are 14.25% and 36%, respectively.
None of this seems to bode especially well for DraftKings. At its recent share price of US$18.92 (down from the low US$60’s in early September 2021), DraftKings’ stock market capitalization is around US$8.2 billion, and, after factoring in its net cash position of about US$1.1 billion, its enterprise value (EV) is roughly US$7.1 billion.
DraftKings has issued revenue guidance for 2021 and 2022 of US$1.24-US$1.28 billion and US$1.7-US$1.9 billion, respectively. This implies the stock has an EV-to-2022E revenue multiple of about 4x, a fairly typical multiple for a growth company.
However, the company’s valuation on the basis of cash flows is more problematic. Its adjusted EBITDA over the last twelve months is a loss of about US$636 million. A large part of this loss stems from heavy sales and marketing expenses of around US$895 million over the same 12-month period. These promotional costs, which the company deems essential to both retain and gain customers, amounted to 78% of DraftKings’ revenue over the year ended September 30, 2021.
| (in thousands of U.S. dollars, except for shares outstanding) | 3Q 2021 | 2Q 2021 | 1Q 2021 | 4Q 2020 |
| Revenue | $212,819 | $297,605 | $312,276 | $322,223 |
| Sales and Marketing Expense | $303,658 | $170,712 | $228,686 | $191,959 |
| Adjusted EBITDA | ($313,658) | ($95,302) | ($139,262) | ($87,884) |
| Adjusted EBITDA Margin | -147% | -32% | -45% | -27% |
| Operating Income | ($546,516) | ($321,554) | ($153,108) | ($268,338) |
| Operating Cash Flow | ($70,886) | ($98,624) | ($77,751) | ($96,584) |
| Cash – Period End | $2,394,985 | $2,646,500 | $2,818,128 | $1,817,258 |
| Debt – Period End | $1,247,785 | $1,324,442 | $1,327,294 | $81,612 |
| Fully Dil. Shrs. Out. (Millions) | 433.1 | 430.3 | 429.0 | 427.8 |
Even if the company’s revenue were to grow ~40% in 2022, its EBITDA losses would likely remain very high for at least the intermediate term. Simply put, in order to gain revenue and market share in the sports gambling business, a high level of promotional spending seems to be required. If such spending were to slow materially, revenue would likely as well.
A positive factor for DraftKings is the structure of its August 2021 agreement to acquire Golden Nugget Online Gaming. Under that deal, which is expected to close later this quarter, DraftKings will exchange 0.365 shares of DraftKings Class A common stock for each Golden Nugget Online Gaming share. In total, DraftKings will issue around 30 million shares. At the time the transaction was announced, the value of those shares was around US$1.56 billion. Now, they are worth around US$570 million. Since the exchange ratio in the merger agreement is fixed and does not vary based on DraftKings’ share price, DraftKings will not have to make up this difference.
Even after losing 70% of its stock market capitalization in about 4 ½ months, DraftKings’ valuation still does not look cheap. On the basis of projected revenue alone, the company’s EV looks reasonable. However, DraftKings’ operating cash flow is unlikely to turn positive for some time based on high promotional spending, and the company’s US$7.1 billion EV is difficult to justify on this measure.
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.
