US Gaming Legalization Will Expand Future Opportunities In Live Betting And Digital Lottery

Key Takeaways

• Expansion of online gaming legalization in more states could significantly boost DraftKings' revenue and growth prospects.
  
• Leveraging expertise in live betting and new verticals like digital lottery could enhance customer engagement and future revenue.
  
• Increased competition and regulatory uncertainty, combined with reliance on key markets, pose significant risks to DraftKings' revenue growth and financial stability.

Catalysts

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

• Expansion of online gaming legalization in the U.S. is anticipated, and additional states are expected to legalize online sports betting and digital gaming, which could significantly boost DraftKings' revenue.
  
• DraftKings is leveraging its expertise in live betting, with investments in technologies and analytics to enhance the live betting experience, potentially increasing customer engagement and future revenue.
  
• Newer verticals, such as the digital lottery courier service, are still in their early stages and are expected to contribute to future revenue growth, particularly as they expand into more states and offer more products.
  
• DraftKings' structural Sportsbook hold percentage is continuing to increase, suggesting that net revenue margins will likely improve as they optimize promotions and mix with higher-margin products.
  
• The company's focus on intelligently deploying capital, including potential debt market opportunities, could optimize their capital structure and enhance shareholder returns, contributing to improved earnings and financial flexibility.

DraftKings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DraftKings's revenue will grow by 22.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.6% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.31) by about March 2028, up from $-507.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.4 billion in earnings, and the most bearish expecting $976.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.0x on those 2028 earnings, up from -38.1x 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 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

DraftKings Future Earnings Per Share Growth

Risks

• The increasing competition in the online gaming and betting space poses a threat to DraftKings, which could impact their ability to maintain or grow their revenue and market share.
  
• The regulatory environment in the U.S. is uncertain, with the potential for increased taxes or changes in gaming laws that could affect DraftKings' net margins and operating costs.
  
• The heavy reliance on a few key markets for gaming legalization and growth means any delays or setbacks could negatively affect projected revenue growth.
  
• Live betting and new product initiatives are anticipated to be EBITDA neutral in 2025, meaning significant investment in these areas might not yield immediate returns, impacting near-term earnings.
  
• The inherent volatility of sports betting outcomes could lead to fluctuations in DraftKings' earnings and margins, affecting their financial performance unpredictably.

Valuation

• The analysts have a consensus price target of $57.771 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 $75.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $39.41, the analyst price target of $57.77 is 31.8% 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.