DraftKings Shares Fall After EPS Beat, Lower EBITDA Guidance

Key Points

• DraftKings shares fell after hours, despite beating adjusted EPS estimates.
• The biggest negative of the release was the 24% decrease in its full-adjusted EBITDA guidance.
• Many jurisdictions have introduced legislation that could legalize online sports betting, which would greatly help DraftKings.

DraftKings NASDAQ: DKNG is in the consumer discretionary sector and is the 17th largest U.S. company in the Hotel, Restaurants, and Leisure industry, with a market capitalization of $17 billion. It is underperforming its sector so far in 2024, with a total return of 0.7%. The Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY has returned 2.7%.

The company reported Q2 2024 financial results on Aug 1, 2024. I’ll start by going over the operations of the business and then review the earnings report. I will then provide some information on what to watch for around the company.

DraftKings Revenue Breakdown: Sportsbook, iGaming, and Daily Fantasy Sports

DraftKings operates as one reportable segment. However, it has three main product offerings that together accounted for 96% of total revenue in 2023: Sportsbook, iGaming, and Daily Fantasy Sports.

The Sportsbook segment allows retail customers to gamble on sporting events. Customers bet against outcome probabilities decided on by DraftKings. Probabilities incorporate a theoretical margin into each bet to generate revenue. When all bets combine, the margin should appear, enabling DraftKings to generate revenue.

The iGaming product is an online casino. Customers can play classic games like blackjack and slots. The games build in an advantage for DraftKings that helps ensure the company brings in more money than it pays out over time.

The Daily Fantasy Sports segment lets customers pick a team of players. They try to score the most points based on the players' real-life performances in sports events.

Customers pay an entry fee to compete against each other, and whoever’s team scores the most points wins prize money. DraftKings brings in revenue by making sure its cumulative amount of entry fees exceeds the amount of prize money paid out.

One notable item on seasonality is that the company's revenues are higher in Q4. The NFL and NBA calendars overlap then. These are the two most popular sporting leagues gambled on in the Sportsbook product.

In 2022 and 2023, revenue spiked by 71% and 56%, respectively, from the third quarter to the fourth quarter.

DraftKings Posts Mixed Earnings Results

DraftKings beat analyst estimates on adjusted earnings per share, which came in at $0.22. This represented a 16% earnings surprise. Adjusted EPS grew by 57% from a year ago.

Revenue came in $20 million below expectations, at $1.1 billion, a surprise of -2%. Revenue grew by 26% from a year ago.

It is also important to note DraftKings' adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), as the company has typically only reported positive EPS on an adjusted basis; however, that was not the case this quarter. Adjusted EBITDA came in at $128 million, 4% below estimates.

The company also significantly raised its revenue guidance midpoint, up to $5.15 billion, from $4.90 billion. This number was 4% higher than analysts expected.

Let's highlight two key metrics: Monthly Unique Players (MUPs) and Average Revenue per MUP (ARPMUP). MUPs increased by 50% from a year earlier, up to 3.1 million.

Strong customer growth in Sportsbook and iGaming caused this. Sportsbook's entry into Washington, D.C., and its Jackpocket acquisition also had an impact. DraftKings completed its $750 million acquisition of Jackpocket in May 2024.

ARPMUP was down 15%, mostly due to lower revenue from Jackpocket customers.

The worst news from the release is DraftKings lowering its full-year 2024 adjusted EBITDA guidance. It decreased the number by 24% from a midpoint of $380 million to $500 million. This likely caused shares to fall 1.6% in after-hours trading, as the results came out after the Aug. 1 close.

What To Watch For: Sustaining Profitability, Recovering ARPMUP, Online Gambling Legalization

DraftKings' revenue growth was solid, but it is a significant deceleration from the over 50% growth in some of the past quarters recently.

The company's big cut to its EBITDA guidance and its raised revenue guidance signals that it underestimated how much the Jackpocket acquisition would lower its ARPMUP. Seeing that number rise back up to previous levels will be an important sign to watch for.

DraftKings is a tough bet. Its forward price-to-earnings ratio is 40, near the top of its sector, yet it has some of the lowest margins in its sector.

However, it did achieve profitability this quarter; we will see if it can sustain this. Legalizing online sports betting in more states is also key to the firm’s success. DraftKings currently operates in 25 states. In 2024, jurisdictions representing 12% of the U.S. population have introduced legislation that could lead to legalization.