Widespread Online Betting Adoption Will Expand iGaming Opportunities

Key Takeaways

• Accelerating legalization and international expansion, combined with real-time media integration, are set to substantially broaden DraftKings' market reach and drive future revenue growth.
  
• Proprietary technology, AI advancements, and strong mobile-first appeal position DraftKings for higher user engagement, greater monetization, and structurally improved long-term margins.
  
• Regulatory headwinds, rising customer costs, and market saturation threaten revenue growth, margin expansion, and earnings stability amid ongoing technological dependence and unpredictable operating expenses.

Catalysts

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

• While analysts broadly agree that U.S. state-level legalization and expansion of online betting will fuel growth, this view likely understates the pace and breadth of adoption, as momentum is accelerating not only in late-adopting states but also from anticipated interstate compacts and early moves into select international markets, which could dramatically lift DraftKings' total addressable market and topline revenue over the next several years.
  
• Analyst consensus recognizes DraftKings' edge in live betting and technology, but this likely underestimates the transformative effect of proprietary tech stack advancements (including the Simplebet acquisition and early AI deployment), which are poised to amplify user engagement, personalization, and cross-sell rates, driving both revenue per user and structurally higher long-term net margins.
  
• DraftKings appears to be in the earliest stages of leveraging artificial intelligence and large-scale automation across both fixed and variable cost centers, and management expects big unlocks in workflows and top-line initiatives, with AI-enhanced trading, risk management, and process efficiency likely to significantly expand EBITDA margin well beyond current targets over time.
  
• The convergence of real-time sports media with betting, and DraftKings' uniquely strong position for integration with upcoming direct-to-consumer streaming platforms, presents an underappreciated opportunity to accelerate customer acquisition, enable exclusive partnerships, and unlock new high-margin interactive monetization routes, all of which could substantially drive future revenue and profit growth.
  
• DraftKings is set to meaningfully benefit from increasing digital adoption and normalization of betting among younger, mobile-first demographics, leading not just to higher user engagement but also to increased average spend and customer lifetime value-trends that management's product innovation pipeline and deepening brand equity are uniquely positioned to amplify in the coming years, resulting in outsized long-term revenue and earnings growth.

DraftKings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on DraftKings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming DraftKings's revenue will grow by 24.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.6% today to 18.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $3.76) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 23.9x on those 2028 earnings, up from -73.4x 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 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

DraftKings Future Earnings Per Share Growth

Risks

• The company faces increasing regulatory and tax headwinds, as seen with recent tax hikes in New Jersey, Louisiana, and Illinois and discussions of state-level surcharges and possible betting restrictions, which could compress net margins and dampen future earnings.
  
• DraftKings is experiencing persistently high customer acquisition costs and acknowledges the intensity of seasonal marketing battles, admitting uncertainties around future cost efficiencies, which could result in continued pressure on net profit and delay in reaching long-term EBITDA targets.
  
• There is ongoing risk from rapid regulatory shifts and tightening consumer controls, such as heightened scrutiny on prediction markets and potential moves to ban or restrict micro betting, which threaten to shrink the total addressable market and suppress top-line revenue growth.
  
• The company's growth in unique users appears to have plateaued on a trailing 12-month basis, with potential vulnerability to shifts in the user mix, especially if large cohorts are impacted by state-specific issues or tightening household budgets, risking stagnation or decline in revenue.
  
• Heavy dependence on external technology and service providers, ongoing renegotiations of long-term deals, and exposure to operating cost variability create risk of unexpected increases in operating expenses, threatening gross margins and overall earnings stability over time.

Valuation

• The assumed bullish price target for DraftKings is $68.84, which represents two standard deviations above the consensus price target of $54.86. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $10.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 8.6%.
• Given the current share price of $45.02, the bullish analyst price target of $68.84 is 34.6% higher.
• 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.