No Sports, No Problem: DraftKings Rallies as Pro Sports Leagues are Sidelined

DraftKings (NASDAQ:DKNG), the world's top daily fantasy sports platform, has had little problem navigating the coronavirus pandemic. In fact, its thriving. But with American professional sports benched since early spring, how can this be?

At the onset of the COVID-19 outbreak, the stock's early 2020 momentum was abruptly halted. This made sense because the cancellation of major U.S. and international sports seasons would theoretically mean little revenue generation for the company.

But since flatlining for much of March, the stock has been a home run. Yet it is still not "game on!" for most professional sporting events. A closer look reveals a clever company with multiple growth levers.

More Than Just Sports

Daily fantasy sports contests are at the core of DraftKings' business, but the next wave of growth will come from iGaming. The early success of its online casino offering has helped fueled the stock's recent ascent. In New Jersey, one of the first states to legalize online poker and casino games, the platform has been a huge success. After growing at an annual rate of 25% from 2014 to 2018, the state's iGaming revenue growth accelerated to 62% in 2019. Last month revenue jumped 124% year-over-year. As the state's economy began to reopen May, this helped confirm that the strong April revenue figure was not just the result of people stuck inside with nothing else to do.

Already a $483 million industry in New Jersey, iGaming has taken off in other states like Nevada and Pennsylvania. The best news for DraftKings and its investors is that this segment is just getting started. Witnessing the success of the New Jersey market, other states are likely to follow and the pace at which they move is likely to quicken. State government budgets are hurting because of the resources that have been devoted to the pandemic and the policing of racial injustice unrest. The receipt of lower tax revenue from closed casinos further increases the odds for online gaming to pass as a new revenue source in multiple states.

Creative new content fills the void

Another reason why DraftKings has more than just survived is that it has been quick to develop new fantasy and sportsbook content to keep its audience engaged. It immediately turned to the wildly popular eSports arena in launching fantasy eSports and Sportsbook eSports platforms. Bettors itching to fill the void left by major sports were given the ability to enter contests based on Madden, Rocket League, Call of Duty, and other gaming competitions. For those not into betting on people playing video games, the company also added table tennis and Korean baseball to its sportsbook.

While it still has had to digest a $15 million to $20 million monthly cash burn without major sports, it has managed the crisis well and strengthened its loyal customer base. These product introductions were not merely band-aids. Innovations around eSports have been particularly well-received and are likely to turn into long-term growth opportunities.

Play Ball!

Ok, so not everyone is confident in their ping-pong wagering abilities. Rest assured our favorite sports team will soon take the field. Much of DraftKings run has been due to positive developments around the NBA's and NHL's plans to salvage the remainder of their 2020 seasons. Optimism around the new NFL season starting on schedule has also been cause for investor celebration.

With social distancing measures likely to remain in place, interest in online sports betting is likely to swell. If fewer fans are allowed into a stadium, those left out are likely to seek other ways to be involved in the action through online viewing and betting platforms. Rather than waiting in a six-feet-spaced winding line at a casino to place a sportsbook bet, hopping online becomes a better option.

While there will most certainly be pent-up demand for sports betting when professional sports return, there is a bigger picture here.

Early Innings of a Long-Run Growth Opportunity

The market has developed an appreciation for DraftKings' potential to capitalize on a global sports betting market that prior to the pandemic was seeing explosive growth.

The company sits in the driver's seat of a massive sports betting and iGaming opportunity. It already has a presence in 26 countries and a leadership position in the industry. The global sportsbook market is estimated to be over $70 billion. A worldwide movement towards favorable industry regulation puts the company at the pole position.

At maturity, the U.S. online sports betting market is projected to be an $18 billion to $23 billion market opportunity. Sports betting, whether through retail or mobile channels, is legal in states that together account for 36% of the U.S. population. There are currently seven states that permit mobile sportsbook wagering and more on the way. Nineteen states have active mobile online sports betting legislation.

Through its recent business partnership with sports betting platform SBTech, DraftKings now offers the country's only vertically integrated online sportsbook. This gives it a significant first movers advantage and a unique ability to drive revenue from both daily fantasy sports and the sportsbook.

Strong Capital Position Enhances Appeal

Since its July 2019 IPO, DraftKings has quickly blossomed from the minor leagues into a mid-cap consumer discretionary darling. While the rocket-shaped trajectory of its chart pattern suggests its primed for short selling, no one seems to want to get in the way. Not even the June 16^thannouncement of a 33 million share secondary offering could knock DraftKings off its throne.

But before we crown DraftKings the champ, it does come with plenty of risk. Although its top line has grown nicely, it is still operating at a loss. A lack of profitability at this stage of the game is not uncommon for an upstart innovator investing heavily to develop its global brand. Nevertheless, management thinks it can hit EBITDA of $1 billion over next few years.

This may be a challenge considering its first-quarter results continued to show a negative EBITDA, but overall, investors like what they are seeing from the company. Prior to the recent equity issuance, it had a $450 million cash balance. This gives it the flexibility to pursue growth initiatives and acquire other complementary businesses. The lack of debt on the balance sheet also sits well with investors as does a healthy dose of insider buying in late May.

While a near-term pullback is plausible, DraftKings looks poised to continue charging higher in the long run. It is well-capitalized and likely to extend its leadership role in the rapidly growing online sports betting and iGaming market.