Summary
- DKNG has fallen just off its peak as the company announced an up to 36.8 million share offering.
- Q3 guidance detailed in the S1-A points to revenues just above consensus, but acceleration of costs and a possible net loss of $0.87 per share.
- Long-term revenue forecasts are quite optimistic and assume a high level of penetration of the population and the market.
- Valuation at 27x 2021 sales and 7.4x low-end 2025 sales is extremely bloated relative to peers MGM, PDYPY, and PENN.
Source: TheStreet
DraftKings (NASDAQ:DKNG) has seen lots of love from the street lately, with Needham and Argus recently slapped 'Buy' ratings on the stock, outlining DraftKings as a leader in the space and the long-term growth potential of the online sports betting industry in the US. While long-term growth is still a long-term positive, DraftKings' heavy rally has pushed valuation up quite high, alongside a 32 million share offering, lockup expiration on October 20 and potential Q3 weaknesses. Shares should be traded with caution at current valuations, given risks to downside potential weigh on to future upside growth.
Although quarterly results have not been finalized, guidance offered in the S-1A is quite paltry. Revenues are expected to be $132 million at the midpoint, with an estimated $15 million negative impact from atypical hold rates on NFL wagers. Gross margin of 63% in the year-ago quarter is expected to decline "at a similar rate as the year over year decline for the period ended June 30, 2020 (3565 basis points)... due to a relative shift in product offering mix from DFS to faster-growing online Sportsbook and iGaming product offerings, which have lower gross margin percentages."
So, if gross margin is expected to be near 27-28% for the quarter, that leaves gross profit at ~$36 million, at midpoint of revenues. Marketing spend is expected to be $200 million to $210 million, even as customer acquisition cost was favorable due to high growth in customers. General and administrative expenses are expected to be 100% to 120% of revenues. That means operating expenses could total $330 million up to $370 million. With that small gross profit, net loss could widen to $300 million up to $330 million; as shares outstanding will have been increased by ~36.8 million from the offering, total shares outstanding near $380 million would give DraftKings an EPS of ($0.79) to ($0.87), based on those calculations. It's mimicking Q2 results, where net loss was 220% of revenues; here, it's 230% to 250%.
It comes down to DraftKings' efforts to rapidly grow the platform - at what cost? The company is well aware that "costly sales and marketing efforts, which may not make sense in terms of return on investment," are inevitable at this stage of the business. Other growth in expenses stems from personnel and headcount growth.
Aside from daunting guidance and hints of accelerating losses as revenues and volume ramp-up, figures around user growth and handle growth point to potential strength, although it won't necessarily be enough to offset losses in the near term.
B2C monthly unique payers are expected to crest over 1 million, rising 64% YoY, as a return to sports led to a surge in customers, as well as a surge in spending. It's a big jump from H1, although lack of available sports likely contributed to the YoY decline. KPIs also point to Q4 showing the highest MUPs, so tailwinds from heightened customer engagement might be able to propel MUP to 1.2 million or higher.
Source: S1-A
