Surging Customer Growth And Tactical Acquisitions Set To Boost Profits By 2025

Key Takeaways

• Strong customer acquisition and declining acquisition costs indicate potential for revenue growth from an expanding customer base.
  
• DraftKings' strategies, including a gaming tax surcharge and integration of Jackpocket, aim to improve net margins and adjusted EBITDA by 2025.
  
• Dependence on aggressive market expansions and promotions, amidst regulatory and tax challenges, may strain DraftKings' profitability and long-term customer retention.

Catalysts

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

• DraftKings is experiencing strong and efficient customer acquisition with a nearly 80% year-over-year increase in new OSB and iGaming customers and a more than 40% decline in customer acquisition cost (CAC), indicating potential for increased revenue from a larger customer base.
  
• The implementation of a gaming tax surcharge in high tax states like Illinois starting January 1, 2025, aims to address financial challenges presented by high tax rates, suggesting a potential improvement in net margins and adjusted EBITDA from 2025 onwards.
  
• The integration of Jackpocket, indicating success and on track for generating positive adjusted EBITDA in fiscal year 2025, suggests potential revenue growth and improved profitability from synergies and cross-selling opportunities.
  
• DraftKings' reiteration of expecting $900 million to $1 billion of adjusted EBITDA in fiscal year 2025, supported by strong business fundamentals, hints at confidence in sustained revenue growth and improved earnings.
  
• The authorization of a share repurchase program of up to $1 billion of Class A common stock reflects strong business confidence and an expectation of significant free cash flow generation in the coming years, potentially impacting earnings per share positively.

Assumptions

• Analysts are assuming DraftKings's revenue will grow by 22.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.5% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.27) by about August 2027, up from $-406.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $549.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2027 earnings, up from -36.0x today. This future PE is greater than the current PE for the US Hospitality industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 4.65% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

• The implementation of a gaming tax surcharge in states with high tax rates could deter customers due to increased costs, potentially impacting customer retention and revenue.
  
• Intense competition and reliance on promotional offers to attract new users could erode profit margins and negatively influence net margins over time.
  
• Regulatory changes or interventions could introduce unforeseen costs or barriers to operation, potentially affecting earnings adversely.
  
• Execution risks related to integrating acquisitions like Jackpocket and maintaining growth momentum could strain operational efficiency and impact net margins.
  
• The strategy of aggressive market and customer acquisition in the face of changing consumer behavior or a downturn in the gaming sector could lead to lower than anticipated revenue growth and affect net income.

Valuation

• The analysts have a consensus price target of $49.04 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 $89.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.0 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $30.14, the analyst's price target of $49.04 is 38.5% 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.