Not a pretty chart

DraftKings, one of the top two names in daily fantasy sports, is also now one of the biggest brands in legal, regulated sports betting in the United States. But that name recognition has not helped its stock price lately, as the company has lost billions in market share.

In terms of percentage drops, the end of last week was awful for the bookmaker. On Thursday, February 17, its stock price closed at $22.06. It opened the next day at $19.00 and closed on Friday at $17.29. That’s a decrease of 21.62%. With markets closed on Monday for a national holiday, we will have to wait until tomorrow to see where things go. After hours trading on Friday showed minimal movement.

Chart courtesy Google Finance

This is DraftKings’ 52-week low point. In March 2021, its stock price peaked at $74.38 per share.

Customer numbers growing, but at a price

So what’s the problem? Let’s take a look at the good news first. Reporting its fourth quarter results on Friday, DraftKings said that quarterly revenue rose 47% to $473 million in 2021. The number of unique paying customers that used DraftKings in the quarter was up 32% to 2 million each month.

And the company has done well with cross-selling its customers with other products, resulting in average monthly revenue per unique customer rising 19% to $77.

But despite the increase in revenue and other positive figures, DraftKings endured a net loss of $326 million in the fourth quarter. Its adjusted loss per share was much better than analysts expected – $0.35 versus $0.81 – but that didn’t do much to ease concerns about the coming years.

The main problem DraftKings is running into is that its revenue growth has been powered by legal sports betting expansion in the US, while the cost of acquiring new customers has been extremely high. It is easy (relatively speaking – I’m oversimplifying here) to increase revenue when new states come onboard, but that does not mean a company will be profitable.

DraftKings has plowed millions upon millions into ad campaigns (a 30-second Super Bowl ad cost $6.5 million) and customer promotions. The company spent gave customers $140 million in various incentives and promotions, such as cash bonuses and free bets, and spent almost $300 in sales and marketing. So right there, they are approaching half a billion dollars simply to attract and keep customers.

Bottom line outlook not good

DraftKings said that it expects 2022 revenue will grown anywhere from 43% to 54%, thanks to further sports betting legalization in the United States. It upped its revenue estimate from between $1.7 billion and $1.9 billion to between $1.8 billion and $2 billion.

But at the same time, it expects an adjusted EBITDA loss from $825 million to $925 million in 2022, whereas analysts expected a loss of $573 million.

Analysts don’t think the bottom line will improve any time soon. Robert Fishman of MoffettNathanson told The New York Times that he doesn’t think DraftKings will be cash flow positive until 2025 or turn an actual profit until 2028. He was surprised at how aggressive DraftKings and its competitors have been with new customer promotions (bonuses and the like), especially in New York where the online gaming tax rate is an astounding 51%.

If DraftKings and the other industry players keep losing money hand over fist on new customer promos, they may have to shift to player retention, which will slow overall growth, hence the bleak outlook at the moment.

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