When the U.S. Supreme Court voted to end the federal ban on sports betting in May 2018, this opened the doors to DraftKings (NASDAQ: DKNG) taking a lead in the U.S. sports betting sector.
Here are three reasons why DraftKings can dominate the field:
1. Existing customer base
DraftKings was created in 2012 and quickly rose to prominence in the fantasy sports space, gaining numerous notable investors, including Major League Baseball (MLB). As of Q1 2020, it has 720,000 unique monthly users, up from 619,000 a year previous. Four million people have deposited money to their accounts and revenue per user rose by $4 up to $41 for the same period.
Once the federal ban on sports betting came to an end, DraftKings was well-positioned to convert its existing fantasy sports customer base into sports bettors. A lot of these people were already bettors, having to use black market alternatives. With DraftKings easily linking to their fantasy accounts, as well as the trust and familiarity factors were other major reasons why people were loyal to DraftKings.
A lot of sportsbooks had little to no presence in the U.S. market when starting off, with significant sums having to be spent in a lot of cases to acquire customers. While DraftKings has always spent a lot on advertising, its acquisition costs were certainly lowered by its existing customer base.
2. Significant investors on board
DraftKings has a number of high-profile names lending their weight to the company, certainly providing strong social proof if nothing else. The company went public in April through a $3.3 billion reverse merger with a special-purpose acquisition company (SPAC).
Michael Jordan recently got appointed to the DraftKings board of directors as a special advisor in return for an equity stake in the company. Other notable sports teams owners involved include Robert Kraft of the New England Patriots and Jerry Jones of the Dallas Cowboys.
As well as bringing great social proof to the company, these people have a lot of expertise about the professional sports scene in the U.S. that could come in handy going forward for DraftKings.
3. Growth opportunities
DraftKings Sportsbook is currently live in ten states. As more areas legalize sports betting, the company’s potential grows. While there are many other notable competitors in the space, such as William Hill (LON: WMH), FanDuel and MGM Resorts International’s (NYSE: MGM) jointly-owned BetMGM, DraftKings is one of the most trusted online brands.
DraftKings is also looking internationally to grow, as it caters to users from across the world with its fantasy offering, with plans in the future to do the same with its sportsbook.
It is also now getting into the burgeoning online casino space, recently launching a platform in New Jersey and Pennsylvania. With so much land up for grabs, DraftKings is certainly positioning itself nicely to take advantage.
Is DraftKings a worthwhile investment?
DraftKings’ reverse merger was a high-profile move and its price quickly doubled after the shares went live on the Nasdaq exchange. Despite the hype, the financials give a truer indication of where the company is at.
Growth costs money, with a net loss for DraftKings of $76.8 million in 2018, $146.6 million in 2019 and $230 million for the first half of 2020. It takes about two years for DraftKings to become profitable after entering the sports betting market in a new state. The COVID-19 pandemic was a setback due to the lack of sporting events for bettors, but this is seen as just a temporary blip.
Revenues are increasing significantly year-on-year and as more states legalize sports betting, economies of scale will kick in. While this would not be the most conservative company to invest in, it certainly has a good head start in the burgeoning sports betting space and its potential is massive.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.