DKNG: Emerging Sports Prediction Markets Will Drive Sector Competition Over Coming Quarters

Key Takeaways

• Expansion into new markets and regulatory liberalization are driving revenue growth and increasing the company's total addressable market.
  
• Proprietary technology, product innovation, and efficiency initiatives are enhancing margins, user engagement, and long-term earnings potential.
  
• Heightened regulatory, tax, and competitive pressures threaten DraftKings' profitability and growth as reliance on current markets persists amid uncertain expansion prospects.

Catalysts

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

• DraftKings is poised to benefit from the continued expansion of legal online sports betting and iGaming into new states such as Missouri, as well as potential future openings; this ongoing regulatory liberalization expands the company's total addressable market and drives sustained revenue growth.
  
• Ongoing product innovation in live betting, in-game personalization, and AI-driven trading is increasing user engagement and dynamic pricing opportunities, which should boost average revenue per user (ARPU) and improve long-term earnings potential.
  
• Efficiency initiatives-including improved promotional spend, cost discipline, renegotiation of legacy access and tech contracts, and leveraging AI for operational optimization-are expanding gross and EBITDA margins, supporting higher net margins and profitability.
  
• DraftKings' proprietary technology, enhanced by the acquisition of Simplebet and in-house developments, is enabling unique betting formats and vertical integration, which should support higher gross margins and strengthen competitive positioning, positively impacting long-term earnings and operating leverage.
  
• The mainstreaming of sports betting, accelerated by cross-industry partnerships with media/streaming companies and strategic capital allocation (e.g., stock buybacks), is expected to lower customer acquisition costs, diversify revenue streams, and fuel both revenue and net margin expansion over time.

DraftKings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DraftKings's revenue will grow by 20.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.6% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $2.68) by about September 2028, up from $-304.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.5 billion in earnings, and the most bearish expecting $813 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.2x on those 2028 earnings, up from -74.9x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• 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 8.6%, as per the Simply Wall St company report.

DraftKings Future Earnings Per Share Growth

Risks

• Growing regulatory risk is evident, with management acknowledging ongoing events around federally regulated prediction markets, state tax increases (noted in New Jersey, Louisiana, and Illinois), and new types of betting (like microbetting) facing legislative scrutiny; future compliance costs or restrictive laws could materially impact DraftKings' revenues and profit margins over time.
  
• Accelerating state-level taxation and uncertain tax policy create significant financial headwinds-management cited around $200 million from recent tax hikes, with unclear customer and competitive responses in states like Illinois, which can reduce profitability and limit DraftKings' ability to offset these impacts through cost efficiencies or pricing changes.
  
• While current growth relies heavily on favorable Sportsbook outcomes and new state launches, management concedes that sport outcomes tend to normalize and promotional reinvestment efficiencies may not be repeatable; future revenue and adjusted EBITDA could be volatile, particularly as organic user growth (like MUPs) shows signs of plateauing, risking slower revenue growth or margin compression.
  
• Expansion into new markets-including international iGaming or prediction markets-remains highly uncertain, and the company is still in "monitor mode" and facing complex regulatory landscapes; if unable to successfully penetrate new, more stable markets, DraftKings' revenue streams may remain overly concentrated and exposed to U.S. regulatory and economic volatility.
  
• Ongoing industry consolidation and intensifying competition (noted in references to pricing strategies, cost structure optimizations, and market access renegotiations) could pressure market share, force higher customer acquisition costs, and erode gross/net margins-particularly if better-capitalized rivals outspend DraftKings on technology, partnerships, or promotional activity.

Valuation

• The analysts have a consensus price target of $54.864 for DraftKings based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 8.6%.
• Given the current share price of $45.91, the analyst price target of $54.86 is 16.3% 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.