DraftKings Faces Second Half Spending Tests

DraftKings (NASDAQ:DKNG) is sparking some confidence among investors following elevated 2022 revenue guidance and perhaps more importantly, a reduced full-year earnings before interest, taxes, depreciation and amortization (EBITDA) loss estimate.

DraftKings
DraftKings
Inside DraftKings home office. An analyst says reduced spending is essential for the operator in the second half of 2022. (Image: Barron’s)

Some analysts believe reduced losses as well as some online sportsbook operators flirting with profitability are signs of more rationalized marketing spending in the industry. The experts add that with football season nearing, it remains to be seen if those lower spending levels are seasonal or structural.

If the big-three simultaneously return marketing/promo intensity to 2H21 levels, this could reaccelerate CPAs for the entire group, leading to greater-than-expected EBITDA losses,” wrote Roth Capital analyst Edward Engel in a note to clients today.

The “big three” he refers to are FanDuel, BetMGM and DraftKings. Engel notes DraftKings ceded both iGaming and sports wagering market share to rivals in the second quarter, but that could be a sign the company is emphasizing efficiencies and profitability over simply gaining market share at all costs.

Can DraftKings Resist Spending Temptation?

Through the end of the second quarter and into the first two months of the third quarter, it’s easy for sportsbook operators to dial back promotional spending because baseball is the only major team sport on the US betting calendar and its handle is dwarfed by football and basketball.

College football arrives later this month, followed by the NFL in September. Then, the NBA regular season commences in late October. In other words, the second half of the year can be a perfect storm of elevated promotional spending for companies like DraftKings.

This year, however, the operator may be inclined to temper second half spending in a bid to appease investors. Shares of DraftKings are higher by 37.10% over the past month and competitor Caesars Sportsbook recently announced it is foregoing profligate spending in the name of acquiring sports betting customers.

“Yet the big-three still control ~70% market share, thus it’s hard to expect incremental marketing rationalization until one of these operators dials back. Promos as a % of GGR for the big-three are still 40-45% vs ~20-25% long-term targets,” adds Engel.

Additionally, several companies in the space are inching closer to profitability, potentially putting a burden on DraftKings to show investors it’s on a similar trajectory.

Speaking of Profitability…

Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN) recently delivered comments that allay concerns about the long-term ability of the sports wagering industry to be profitable.

“After CZR’s aggressive marketing push in 2H21, its market share has been stable YTD despite a drop in marketing/promos, and it achieved EBITDA near break-even in July,” said Engel in the report. “Alternatively, Penn expects positive EBITDA in 4Q amid a less aggressive marketing strategy that’s come alongside stable (albeit low) market share.”

Reduced promotional intensity and an increasing focus on profitability are pluses for the industry, including DraftKings. Now, it’s on operators to resist the temptation of elevated spending simply because football season is arriving.

The post DraftKings Faces Second Half Spending Tests appeared first on Casino.org.

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