DraftKings went public on April 24, 2020 via a reverse merger with SPAC Diamond Eagle Acquisition Corp. DraftKing’s last private funding round was in October 2018, when it raised $200 million at a post-money valuation of $1.7 billion. Venture Capital investors included ACME Capital, 111 Holdings, Data Point Capital, Growth Technology Partners, Quantum Global Partners, Revolution, DST Global, FirstMark Capital, GGV Capital, Redpoint Ventures, Counterview Capital, and Atlas Ventures. DraftKings reported second-quarter results in August. The consensus forecast called for a loss of $0.17 per share. The actual loss was $0.55 per share. Revenue was $70 million, up 22%. First-half revenue of $159 million was up 27% from the prior year. Along with the results, the company projected 2020 pro forma revenue of $500-$540 million, implying year-over-year growth of 22%-37% in the second half. This guidance assumes that the professional sports calendar remains as currently contemplated and that DraftKings continues to operate in the states in which it currently does business. DraftKings does not at this time expect the pandemic to have an impact on its long-term plans. The company is growing in part by launching operations in states that have recently legalized sports betting.
EARNINGS & GROWTH ANALYSIS
Sales in 2Q rose 22% to $71 million. This growth was driven in part by a 50% year-over-year increase in average revenue per monthly unique player, to $42, offset by a 36% decline in the average number of monthly unique payers, to 295,000. On the expense side, the cost of revenue accounted for 71% of 2Q sales, sales and marketing for 63%, product and technology for 48%, and G&A for 121%. We expect these ratios to decline as revenue grows over time. We expect DraftKings to have its first profitable quarter in 2022.
FINANCIAL STRENGTH & DIVIDEND
The company has no long-term debt, but is currently unprofitable.
MANAGEMENT & RISKS
Jason Robins is the company’s CEO and co-founder. Jason Park is the CFO, joining the company in June 2019. Matt Kalish serves as president; he co-founded the company in 2012. It is also investing in new product and platform development and expanding geographically. DKNG investors face risks from changes in consumer spending trends, regulatory developments, competition from rival companies and technologies, as well as from the company’s ability to manage betting risk. The company also has a history of generating losses.
Applying the peer average price/sales ratio of 44 to potential 2022 revenue of $1 billion, discounting back into 2020 dollars, and adjusting for the share count, we arrive at a target price of $65 – above current levels.