Mounting Regulations And Stiff Competition Will Restrict iGaming Prospects

Key Takeaways

• Regulatory pressures and social concerns are tightening, threatening margins, growth potential, and the size of DraftKings' addressable market.
  
• Slowing market expansion, rising competition, and reliance on promotions challenge profitability, revenue growth, and business diversification outside traditional sports betting.
  
• Expanding legalized markets, tech-driven efficiencies, and product diversification position DraftKings for sustained growth, margin improvement, and greater earnings stability.

Catalysts

Operates as a digital sports entertainment and gaming company in the United States and internationally.

• Persistent and escalating regulatory scrutiny on gambling and sports betting is expected to lead to higher tax rates, stricter advertising limits, and increased compliance costs across key jurisdictions. Recent and anticipated hikes in state taxes, such as those in New Jersey, Louisiana and Illinois, are already being incorporated into guidance and are likely to further compress net margins and constrain future EBITDA growth.
  
• Heightened consumer and political concern over problem gambling and addiction may trigger additional restrictions, social pushback, or outright bans on certain betting products, particularly micro betting and prediction markets. Such regulatory responses threaten to cap new customer growth, shrink the long-term addressable market, and limit revenue expansion potential.
  
• Intensifying competition from both entrenched rivals like FanDuel and BetMGM, as well as vertically integrated casino and media companies, will likely force DraftKings to increase promotional spending and customer acquisition costs to defend or grow market share. This undermines prospects for sustainable net margin expansion and could reverse recent gains in marketing efficiency, impacting long-term profitability.
  
• The long-term growth potential from state-by-state legalization is losing momentum, with fewer new large states opening up and some populous states likely to resist expansion due to political or social concerns. This will result in slower top-line growth and increasing reliance on a saturated and maturing U.S. market, limiting the company's ability to drive consistent revenue and earnings growth.
  
• Persistent reliance on promotional offers and structural industry headwinds-exacerbated by the risk of rising inflation and weaker discretionary spending-are expected to pressure revenue per customer and stall increases in total handle. The inability to diversify revenue meaningfully outside traditional sports betting or to successfully penetrate new verticals heightens the risk of stagnating revenues and inability to generate positive free cash flow over the long term.

DraftKings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DraftKings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DraftKings's revenue will grow by 17.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.6% today to 12.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.0 billion (and earnings per share of $2.13) by about August 2028, up from $-304.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from -73.3x today. This future PE is greater than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 2.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

DraftKings Future Earnings Per Share Growth

Risks

• DraftKings continues to benefit from long-term secular trends such as the ongoing legalization and social acceptance of online sports betting and iGaming, which fuels expanding addressable markets and supports multi-year revenue growth.
  
• The company is achieving operational scale, improving technology infrastructure, and activating AI-driven efficiency initiatives, collectively contributing to sustainable margin expansion and the potential for consistent positive net income and EBITDA in the coming years.
  
• DraftKings is executing on customer engagement strategies like industry-leading live betting and hyper-personalization, driving higher user retention, longer customer lifetimes, and increasing average revenue per user, all of which support stronger revenue growth and margin improvement.
  
• New vertical expansions, such as enhancements in iGaming and exploration of prediction markets, along with potential partnerships in sports media, diversify and grow DraftKings' revenue streams, lessening the impact of cyclicality and bolstering long-term earnings stability.
  
• DraftKings is actively optimizing its cost structure through renegotiation of legacy market access and data rights agreements, leveraging scale for better terms, and reaping operational efficiencies that are likely to improve net margins and accelerate free cash flow generation over the long term.

Valuation

• The assumed bearish price target for DraftKings is $40.83, which represents two standard deviations below the consensus price target of $54.8. This valuation is based on what can be assumed as the expectations of DraftKings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $78.0, and the most bearish reporting a price target of just $39.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.7 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $44.94, the bearish analyst price target of $40.83 is 10.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.