DraftKings Aims to Out Duel Opponents
Like many other entertainment industries, the gambling sector is getting crushed by COVID-19.
Casinos have been closed for months, major sports have been suspended and even the Olympics were postponed. The prospect of large gatherings seems far off, at best.
But while physical sites to gamble are closed, it doesn’t mean the industry is dead. It’ll have to go through a digital transformation to survive, though.
One company these same gamblers could turn to is DraftKings Inc. (Nasdaq: DKNG, Rated “U”).
They have big plans to move sports betting and other games of chance online. It’s an important digital transformation story that could not have come at a better time.
DraftKings is a spanking-new public company. The Boston-based firm is the product of an April merger with U.K-based SB Tech, a sports betting technology company, and Diamond Eagle Acquisition Corp. The combination mixes strengths in the online fantasy sports community, finance and best-in-class digital wagering technology.
It’s also the only public, vertically integrated sports betting company in the United States just as legalized sports betting is sweeping through the country.
Since a New Jersey Supreme Court ruling in 2018, 21 states have made gambling on sports legal, according to an ESPN report. An additional 26 states are on track to do the same. At this point, only Idaho, Wisconsin and Utah are outside looking in.
The appeal for states is tax revenue.
David Katz, an analyst at Jefferies, says the total addressable market for legal sports betting in the United States is currently $13 billion. A DraftKings investor presentation claims the market might be as large as $21 billion if all states come online through the next two years.
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The United States is a hotbed of professional and college sports. And SB Tech’s bet engine, risk management tools and algorithms are robust enough to accommodate a barrage of non-standard, in-game bets. Patrons will be able to wager on live, play-by-play outcomes. It’s a big opportunity.
In New Jersey, the first state to move aggressively toward iGaming, DraftKings has been able to achieve 30% market share and $75 million annual sales. Keep in mind, this was without SB Tech, so with the backend tech now in-house, margins are expected to climb.
Unfortunately, there is no way to know by exactly how much, yet. Previously managers said the company should do $700 million in 2020 revenues. That number is now in doubt.
Professional sports have shuttered globally as leagues scramble to keep players safe while working out how to put on live events that depend on money from large gatherings. Recently, among the major sports leagues, UFC and NASCAR have resumed with no fans allowed.
Aside from online gabling on live sports, there are other opportunities on the horizon for DraftKings.
They’ve made some progress with eSports, a form of sport competition that uses video games. It has a deal with Electronic Arts Inc. (Nasdaq: EA, Rated “C+”), the publisher of the Madden NFL video game franchise, to show live simulations six times every day.
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Even still, managers admit events like these are more to keep current patrons engaged rather than grow their active users or generate revenue.
Shares are up 176% in 2020. The market capitalization is now $20.6 billion, 55.8 times sales.
The prospects for online sports betting are bright. DraftKings has a really good chance to do well as a technology leader and first mover.
Jon D. Markman