Online sportsbook operators are known for spending big to attract customers and DraftKings (NASDAQ:DKNG) is no exception to that trend, but at least one analyst is concerned about the company’s promotional expenditures eating at fourth-quarter net gaming revenue (NGR).
In a note to clients, Roth Capital analyst Edward Engel says that while DraftKings’ gross gaming revenue (GGR) for the last three months of 2021 likely surged, promotional spending remained elevated.
While we believe DKNG’s 4Q GGR increased 70 percent quarter-over-quarter (QoQ), the midpoint of DKNG’s guidance implies net revenue +105 percent QoQ (vs Street modeling +110 percent),” writes the analyst. “Guidance/Street forecasts imply the ratio between NGR to GGR returns to 1H21 levels; however, state reported NGR data indicates promos remained elevated since Sept., increasing our conviction in a 4Q miss.”
Engel, long one of the analysts most bearish on DraftKings, rates the stock a “sell” with a $23 price target. That’s roughly where the shares trade at this writing. His gloomy assessment on the operator’s fourth-quarter NGR comes ahead of the company’s earnings updated, which is scheduled for Friday, Feb. 18 before the open of US markets.
DraftKings Market Share Increased, But So Did Spending
Citing data from BetMGM’s recent update, Engel notes that DraftKings’ iGaming and online sports betting market share ticked higher in the October through December period.
But, there’s a “but.” Gains on the internet casino front were likely attributable to Connecticut, where DraftKings is one of the dominant operators, opening to that activity. As a result, Engel says most of the company’s fourth-quarter iGaming gains were the result of promotional spending.
Results from other states are also likely to reflect elevated levels of spending to attract bettors.
“After a ~90 percent NGR/GGR ratio in 1H22, the ratio dipped to 62 percent in 3Q (70% ex-Arizona). The midpoint of 4Q guidance implies a rebound to ~85 percent,” adds Engel. “Meanwhile, DKNG’s NGR/GGR ratio for Pennsylvania OSB declined to 69 percent in 4Q from 78 percent in 1H21. Industry metrics for Colorado/Virginia confirm suppressed ratios in 4Q vs 1H; although, DKNG’s Michigan NGR shows improvement.”
The analyst adds that while data from Indiana and Iowa indicate January sports betting handle jumped, online sports wagering hold was likely “subdued” for DraftKings and other operators.
Profitability Still Dogging DraftKings
When DraftKings will cease losing money remains an issue analysts and investors are focusing on and the picture isn’t likely to brighten anytime soon, according to Engel.
“We expect investors to focus on DKNG’s cash burn and path to profitability, where we model positive earnings before interest, taxes, depreciation and amortization (EBITDA) in 2025 after an inflection during 2024,” said the Roth analyst. “We model $2.2bn of cash at YE2021, vs similar cash burn in 2022 as 2021 and positive free cash flow in 2026.”
He adds that the $1.3 billion worth of convertible bonds sold by DraftKing last year, which come due in 2028, is another concern for investors because bondholders can convert that debt to shares of the company at $70.
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