Customer acquisition costs critical in DraftKings’ Q4 earnings

DraftKings was a hit in the pandemic. However, the reopening of the economy has hurt its share price. The Super Bowl effect and an increase in legalised gambling across the US could reverse the fall unless it forecasts a drag from high customer acquisition cost.

Online betting group DraftKings [DKNG] is expected to report a 36.6% rise in year-over-year revenues. However, the company's loss per share is estimated to continue widening 15% when it reports its fourth quarter (Q4) figures on 18 February due to a drop off in demand.

“We continue to drive strong growth in player acquisition and retention,” said DraftKings chief financial officer Jason Park in November, “[but] investment in new state launches includes promotional expense, cost of revenue and external marketing.”

Wall Street analysts expect DraftKings to report a Q4 loss of $0.78 per share, greater than the loss of $0.68 it recorded in the same period a year ago, as reported on Nasdaq. Revenues are set to grow more than 36% to $439.5m. Investors are concerned about the costs of fending off competition in the marketplace.

Yet, Friday’s announcement could boost the stock price depending on demand data from customers and more US state partnerships.

“We are constantly inspired by the innovation of tech, consumer experience, sports and more,” DraftKings CEO Jason Robins (pictured above) tweeted recently. Investors will be looking for how the company has actioned this.

Betting Demand Rising

Demand is likely to have perked up with the National Football League’s (NFL) regular season coming to an exciting close in January, ahead of the equally thrilling playoffs.

DraftKings launched mobile betting operations in Louisiana, Oregon and, crucially, New York last month as more US states legalise betting. The New York market may be worth an estimated $1bn in gross gaming revenue annually, according to The Motley Fool.

A total of 30 US states, plus Washington DC have now legalised gambling in some form, “paving the way for DraftKings and others to expand”, reported the InvestorPlace. Despite the demand and revenue potential in such a large market there are concerns over the cost of winning these sales in a competitive market.

Ahead of last weekend’s Super Bowl, DraftKings was estimated to have given away $10m in free bets and promotions to people who used its app to bet on the game.

“An issue with this sort of business is how much of its revenues come due to player incentives,” said Ian Bezak, a contributor to InvestorPlace. “Betting sites will offer folks teaser lines, unusually generous parlays, matching bets, or other such perks to bet the game on their app instead of a rival.” Aside from incentives, other costs include sales and marketing, product development and administration.

DraftKings share price

These cost worries have slammed the DraftKings share price, which has dropped 63% over the past 12 months. It has also been hit by investors turning away from classic ‘stay at home’ stocks, which benefited greatly from lockdown, and returning to companies that are profiting from the reopening of the economy.

DraftKings's failure to buy betting rival Entain [ENT.L] and a general move away from growth to value in these times of high inflation has also hit its share price.

The Entain share price has risen 23% over the same time period, with Flutter Entertainment [FLTR], a holding company for a number of brands including Paddy Power and Betfair, down 22%.

DraftKings has a 4.73% weighting in the Roundhill Sports Betting & iGaming ETF [BETZ], whose share price has dropped 30%.

DraftKing’s previous earnings announcement

In its third quarter DraftKings posted revenues of $213m, up 60%, but missing forecasts of $231.5m. It said it could have been $40m higher if it hadn’t been for some adverse NFL betting results.

Monthly unique payers increased by 31% and average revenue per monthly unique payer grew by 38%. Losses were higher than expected with an adjusted EBITDA loss of $314m. It spent $304m on sales and marketing.

“DraftKings had a strong third quarter that highlights our team’s unique ability to drive engagement with our core customers while simultaneously launching new states and verticals,” said Jason Robins, the company’s co-founder, CEO and chair. DraftKings shares rose 5% after the announcement.

Expectations from Q4 commentary

Investors will be keen to hear about costs, incentives, demand and future state deals.

Morgan Stanley analyst Thomas Allen is certainly optimistic about the stock, forecasting that revenue from legal US sports betting and iGaming will increase from around $1.5bn in 2019 to $20.6bn in 2025 as more states legalise and spend per capita rises, reported on the Nasdaq website.

“Its current valuation does not reflect long-term margins or growth,” Allen wrote. “Upside drivers include signs of profits in mature states, new product innovation and higher market share. Downside risks include higher losses, greater competition and lagging product innovation.”

“[DraftKings'] upside drivers include signs of profits in mature states, new product innovation and higher market share. Downside risks include higher losses, greater competition and lagging product innovation” – Morgan Stanley analyst Thomas Allen

Needham analyst Bernie McTernan has a ‘buy’ rating, believing DraftKings has a “sustainable customer acquisition strategy that should continue to drive its first or second place position in all states,” reported The Fly.

According to MarketScreener, analysts have an ‘outperform’ rating on the stock and a target price of $50. That compares with the $22.20 it closed at on 14 February.