DraftKings TRA Expanded Report

February 7, 2024Insight

Rating: 2.25
Outlook: Stable

DKNG began trading as a public company in April 2020, just as the pandemic lockdowns halted professional and collegiate athletics, via a Special Purpose Acquisition Company (SPAC). The past four years have been a bumpy ride for shareholders, but the company has grown market share and is gradually reigning in its recurring losses. DKNG still has a lot of work to do to become profitable and sustainable, and it will face substantial challenges from its leading pureplay sports betting peer FanDuel, as well as other online and on-premises sportsbooks, in an industry that is poised for consolidation amid significant network and regulatory hurdles.

DKNG also illustrates a rare and counterintuitive economic phenomenon known as the Law Of Negative Returns. Interestingly, as DKNG builds scale and grows monthly unique players, the wisdom of crowds contributes to the erosion of gross margins. DKNG’s margins compressed from 43% in 2020 to 32% for the nine-month period ending September 30, 2023. Sports gambling is thus one of the few businesses that is likely to see margins weaken due to increased market share. However, there is typically a gross margin floor that is protected by the frequent adjustment of odds in each wager over time as more players place wagers.

DK is likely to remain a speculative risk company due to its recurring cash burn, the competitive nature of the category, and regulatory uncertainty, combined with the need for material ongoing sales and marketing expenditures to expand market share.

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