DraftKings Analysis

Founded in 2012, DraftKings operates fantasy sports and sports betting, covering U.S. professional leagues and the English Premier League. DraftKings first started with one-on-one fantasy contests in MLB, and in 2013 it laid the foundation for growth by receiving an official investment from MLB. After sports betting was ruled constitutional in 2018 in all states except Nevada, where it was already legal, the company launched its sportsbook service in New Jersey. It now operates sportsbooks in 21 states in addition to New Jersey and continues to expand. As a result, it runs fantasy leagues and betting for the five major U.S. professional leagues—MLB (baseball), NBA (basketball), NHL (ice hockey), NFL (American football), and PGA (golf)—as well as the Premier League and UEFA Champions League (soccer), plus a variety of other sports such as boxing and tennis.

While the company’s core growth and expansion come from fantasy leagues and its sportsbook, its business characteristics make collaboration with sports leagues and various partners stand out as a key driver of market reach and market share gains.

As DraftKings’ first and still most important line of business, fantasy sports contests held daily and weekly serve as the main funnel for user acquisition. Users pay an entry fee to enter their team into a fantasy league. These entry fees are pooled into a cash prize fund that is distributed based on team performance, but more importantly, they account for a large share of revenue. Beyond simple league-format contests, DraftKings hosts a wide range of formats—head-to-head contests, 50/50 contests, and large tournaments—drawing in diverse user segments. From the user’s perspective, the ability to choose formats and prize levels that match their preferences creates the appeal of experiencing the thrill of professional sports leagues themselves. In particular, because there are not only daily contests but also week-long contests, users can build their teams based on the weekly performance and statistics of the players they select. This high degree of direct involvement makes the experience feel more realistic and turns the platform into a place where users can enjoy the tension of picking teams and waiting for results every day and every week, along with the fun of sports.

The entry fees collected from user participation are the revenue source for fantasy leagues, and because the fees vary depending on prize levels and league formats, DraftKings can effectively capture both big spenders and more casual, low-spend users. As the user base grows, the number of leagues and opposing teams available for competition also increases, which naturally drives higher revenue, while users benefit from heightened competitiveness and community development. This, in turn, generates stronger network effects through increased engagement and retention. For this reason, even though DraftKings is focused on business expansion, its annual and quarterly reports indicate that it continues to invest heavily in retaining its existing user base and acquiring new users. In 2016, it attempted to merge with FanDuel, the number-two player in the industry, but the deal collapsed due to the FTC’s antitrust concerns, as the combined entity would have controlled over 90% of the market.

The sportsbook business, which allows users to bet on the outcomes of sporting events or on individual player performance, has seen explosive growth in the United States since sports betting was legalized in 2018. In this area as well, it is no exaggeration to say that DraftKings is one of the clear leaders. Having grown into the next key business line after fantasy leagues, the sportsbook business gained a major boost in 2020 when DraftKings went public through a reverse merger with Diamond Eagle Acquisition Corp. and SBTech, acquiring sports betting technology in the process and securing a stronger platform for growth.

Sports betting is similar to traditional gambling: users wager money on the outcome of a game, a league, or player performance, and if they win, they receive a payout based on the odds. As with fantasy leagues, winnings are paid out from a pool funded by other users’ stakes, and DraftKings generates revenue by taking a fixed percentage of the betting volume as a fee. In other words, the higher the amount each user bets, the higher DraftKings’ revenue. As with fantasy leagues, there are multiple betting tiers and products, and users can bet on a wide range of factors such as game results and player stats, allowing the company to target a broad user base. As the user base expands, the total payout pool grows, and the network effects become stronger, so DraftKings is heavily investing and setting clear goals around user retention and acquisition.

Commonly referred to as online gambling or online casino, iGaming offers classic casino games such as poker, blackjack, and slots, rather than sports betting. Similar to the sportsbook, DraftKings offers around 400 such games and generates revenue through in-app payments and user participation.

As with sports betting, users purchase chips via in-app payments, use those chips to participate in games, and receive payouts when they win. DraftKings earns revenue by charging fees on in-app payments and taking a fixed percentage of the amount wagered. As the sportsbook business has grown, iGaming appears to target both existing users who may have become bored with sports betting and the broader casino industry that is shifting to online platforms. Given that both areas are still relatively new and have significant growth potential, the company can reasonably expect highly attractive future earnings from them.

Because most users access fantasy leagues, the sportsbook, and iGaming through the app, in-app advertising has also become a major business for DraftKings. All of these services are available within a single app, and the large user base makes in-app ad placements a valuable opportunity for advertisers to reach a massive pool of potential customers. By providing advertisers with user data such as demographics and preferences and enabling targeted advertising based on that data, DraftKings offers access to a large number of potential customers who are likely to convert in the real world. This makes advertising a business line with high potential for future partnerships and revenue.

By signing partnership agreements with multiple professional sports leagues (NBA, MLB, NHL, and others), DraftKings has become their official fantasy league partner. This allows DraftKings to benefit from advertising exposure within each league, while the leagues, in turn, receive solutions such as user data analytics related to sports betting and performance analytics for their players, creating a mutually beneficial relationship.

By delegating digital technology and operational functions to DraftKings, partner companies can focus on branding, marketing, and sales, while DraftKings is able to recognize a portion of their revenue as its own. In this way, DraftKings leverages its technology and support capabilities to capture a share of partners’ revenue and at the same time indirectly promote its brand and increase market share—effectively achieving two goals at once.

Because DraftKings is primarily a services business, the number of users is more important than revenue, so we first look at user metrics. In the third quarter, the number of monthly unique paying users was 2.3 million, up 40% year-on-year. Average revenue per monthly unique payer reached 114 dollars, a 14% increase from a year earlier. DraftKings currently holds the number-one market share in fantasy sports and a 32% share in online sportsbooks, second only to FanDuel’s 45.1%. In the third quarter, the company also captured 33% of total revenue in the online gambling market, including iGaming, and is showing steep growth in online casino games as well. Judging from its current strategic direction and stated goals, DraftKings clearly appears to be focusing on expanding its sportsbook and iGaming businesses while prioritizing user base growth and retention.

Online sportsbook and iGaming revenue market share

As a result, total revenue for the third quarter of 2023 was 790 million dollars, up 57% and 288 million dollars year over year. This appears to have been driven by growth in paying users, with iGaming revenue rising 299.8 million dollars year over year to 768.3 million dollars. The increase seems to reflect a combination of factors: the recent launch of the sportsbook service in Kentucky, expansion of the existing user base, and the rollout of multiple new offerings across iGaming and the sportsbook. The company also raised its 2023 revenue guidance by 10 million dollars to 3.65 billion dollars, and lifted the midpoint of its 2023 EBITDA guidance from negative 205 million dollars to negative 105 million dollars. Riding this strong momentum, the share price has also been setting new 52-week highs, further boosting the company’s valuation.

On the back of higher revenue, EPS also improved from negative 1.00 dollars last year to negative 0.61 dollars, slightly beating analysts’ consensus estimate of negative 0.69 dollars and coming in broadly in line with expectations. DraftKings’ persistent net losses are understood to stem from its still-expanding sportsbook business. According to the third-quarter earnings report, operations in three states in addition to Kentucky, which the company entered after September 2022, are still in the stabilization phase, and losses appear to be driven by higher cost of revenue and increased marketing spend associated with the enlarged user base.

Looking at the third-quarter balance sheet, cash holdings edged down from 1.3 billion dollars at the start of the year to 1.1 billion dollars. In terms of leverage metrics, the current ratio stands at 1.29, indicating a cash and liquid asset position at a somewhat risky level. The debt-to-equity ratio is 1.67, which is also close to a risk threshold, and the fact that it has been steadily rising over the past few years raises concerns about the company’s debt load.

As the operating loss suggests, cash flow is still negative, but the deficit has narrowed significantly, from negative 665.74 million dollars last year to negative 191.25 million dollars through the third quarter of this year. Last year, the acquisition of GNOG led to a substantial negative cash flow, whereas this year cash outflows have eased somewhat thanks to returns on financial assets and lower taxes. In particular, as there appear to be no further acquisition plans at this point, the current trend of shrinking negative cash flow is likely to continue.

Putting these factors together, our view on the company leans toward a Buy. Because its core business is closely tied to the sports industry, which can consistently attract new users, we see upside from revenue growth and normalization of cash flows through ongoing partnerships with multiple leagues. Whether in the short or long term, the broader trend toward expanding betting and gambling services should support further growth. In particular, online betting is still not legal in many US states, and legalization measures are currently on the agenda or moving through state legislatures and election pledges. As more states legalize and the company expands in tandem, we can reasonably expect an enlarged user base, higher revenue, and a range of other positive effects. As betting and gambling services migrate online, especially to mobile, we also expect a steady inflow of users who no longer need to visit physical casinos. Given the low barriers to participation and the inherently addictive nature of these services, we see limited downside risk and do not expect the lower bound of potential returns to be especially low.

We also believe there is still room for growth in fantasy leagues, which have somewhat fallen out of focus but retain meaningful market potential. Globally, the fantasy league market is currently worth 28.77 billion dollars and is projected to grow to 54.98 billion dollars by 2028, implying a CAGR of 13.8%. North America, the most active region, has a market size of 11.7 billion dollars today, expected to reach 21.46 billion dollars by 2028, a CAGR of 12.9%. Because fantasy leagues are classified as skill-based rather than gambling, they face a lower risk of legal restrictions and allow the company to continuously target consumers seeking a more “wholesome” activity. That said, several US states still classify fantasy leagues as illegal, so investors should consider the possibility that regulations could be eased in tandem with broader liberalization of sportsbook rules. Even so, as smartphones and other digital devices make it easy and convenient to participate and check results, it should become even easier to attract sports fans. In Europe, the second-largest market after North America, the introduction of fantasy leagues for soccer, tennis, and other sports is expected to draw in an even larger user base.

The first broad risk factor is consumer preference, which is always in flux. While the company enjoys strong brand recognition in the United States, the sports leagues it is involved with are not confined to the US, so there is a constant risk that it could lose ground to competitors active in other sports markets. Because gambling and fantasy leagues are discretionary leisure activities, this is also an industry that can be hit early and hard when consumer spending deteriorates amid economic downturns. Moreover, regulations on gambling are highly sensitive to public opinion and can swing between legalization and prohibition, so in an extreme scenario one must even consider the possibility that legal changes could force the company to halt services.

Given that the company’s core business is online, it is inevitably exposed to shifting consumer preferences for digital platforms in a landscape that changes by the day. The company itself acknowledges that there are numerous potential issues that could arise with its digital platforms and online services. External attacks or internal errors could lead to service outages or disruptions, which in turn could have negative effects even at the customer acquisition stage.

Even setting these issues aside, the negative cash flow that the company itself has flagged as a concern remains a major risk factor. In its latest annual report, management stated that it cannot yet guarantee revenue levels or positive cash flow sufficient to generate net profit. It also warned that revenue growth could slow, reflecting the higher costs and investments required for a business that is still in expansion mode. In addition, as in the past, the company noted that it cannot rule out the possibility of continued net losses, and emphasized that, as a business heavily dependent on user activity, its revenue and profit are closely tied to how actively its customers engage with the platform.