Revenue up, share price down
This week, the share price of US-based sportsbook giant DraftKings hit an all-time low. It dropped below the $11 mark for the first time since CEO Jason Robins took the company public in April 2020. On Wednesday, the price fell to its lowest point of $10.27, a staggering fall of more than 63% from the beginning of the year.
Rewind to 2021, however, and you will witness a different story entirely. In the first year after it went public, the company saw its share price rise to an all-time high of $74.38 – a far cry from the sub-$11 lows seen this week. The peak formed part of a year-long period of significant growth in which the company raised its revenue to $1.3bn for the full year, up 111% from 2020.
Robins’ announcement prompted a further 23% drop
This growth saw DraftKings ambitiously raise its fiscal year 2022 revenue guidance to a range of $1.85bn to $2bn. After announcing the company’s positive Q1 results this week, Robins actually confirmed that the revenue looks likely to reach close to or even surpass $2bn, music to the ears of any DraftKings investor, right? Wrong. Robins’ announcement prompted a further 23% drop in share price.
It’s certainly a strange pattern. Why does DraftKings’ revenue continue to increase year-on-year while its share price travels in the opposite direction? Well, there are a number of reasons for this discrepancy, ranging from marketing spend to the easing of pandemic restrictions and concerns over an impending recession.
An issue with profitability
One of the most important things to keep in mind regarding DraftKings is that revenue doesn’t tell the whole story, far from it. As it continues to face stiff competition in the US sportsbook market, the operator has a serious profitability problem that doesn’t look set for improvement anytime soon. In fact, it’s likely to get worse as more states join the legal market.
The sportsbook operator made sure to highlight its impressive revenue growth in 2021, but its losses told a different tale. Overall, DraftKings’ net loss reached $1.52bn last year, thanks mainly to sales and marketing spend. Marketing costs nearly doubled year-on-year to 981.5m, equating to roughly 75% of the firm’s entire revenue for 2021.
made a loss of $468m for the first quarter of the year
It seems this trend has continued into 2022 as well. The betting firm made a loss of $468m for the first quarter of the year as it expanded into new states, now live in 17. Total operating expenses hit $933m, up 46%, the lion’s share of which went towards sales and marketing at $321.4m.
If you’re thinking there seems to be a theme here, then you’re correct. As it spreads itself further across the US, the operator is increasing marketing spend to secure customers, and it is coming at a high cost. In fact, it’s costing a lot of operators highly, prompting American Gaming Association CEO Bill Miller to describe the betting marketing war as “an unsustainable arms race.”
Wall Street has evidently lost faith in Robins’ commitment to this strategy, in which profitability has taken a back seat. However, to the CEO’s credit, it does seem to have garnered some positive results. Recent research has suggested DraftKings has the highest share of app downloads in the US market and 60% of all downloads combined with FanDuel. Now, Robins just has to turn that notoriety into profit.
Fears over the market
Investors aren’t just concerned with Robins’ strategy to dominate the market, they’re also worried about the market itself.
The beginning of 2020 saw a dramatic surge in online sports betting profits as the COVID-19 pandemic swept across the globe. This had a clear impact on sportsbook stock, including the newly public DraftKings. Buoyed by a huge uptick in revenue from home-bound bettors, its share price rose from $11.48 in mid-March to $63.78 by the beginning of October.
While the ending of restrictions and the opening of land-based gambling venues might have been good news for the rest of the world, mobile sportsbook operators such as DraftKings have suffered as a result. As Nevada casinos – boosted by the ending of restrictions – posted their seventh straight month of $1bn revenue at the end of 2021, DraftKings stock began its slide back down to earth.
Investors also have concerns lying far beyond US borders. The war in Ukraine has created a fragile economy, gas prices have risen to extortionate levels, and there are suggestions that a recession could be in the post. Robins acknowledged that this might be a cause for concern for investors in his call this week, but he pointed to the firm’s clear “path to profitability” as a reason for faith.
A man on a mission
While all of these issues might have prompted investors to turn their back on DraftKings, the company’s CEO is far from abandoning ship. After learning of the price drop this week, Robins took to Twitter to let those who sold shares know his plans:
Despite the bold words from Robins, one Twitter user was quick to remind the chief executive of all the shares he sold in the company last year. According to his trading plan, he has rid himself of 2.3 million DKNG shares since May 2021, also selling 1.8 million shares following the company’s Initial Public Offering in April 2020:
Whether Robins’ faith in his company mission is as strong as he claims is a debate for another time, but investors evidently have lost their patience. In the last three months, only around $2m worth of DraftKings shares have been bought, meaning the buy-to-sell ratio is around 1:15. In the last two to three weeks alone, several insiders have sold a cumulative $31.8m in DKNG shares.
Evidently, Robins needs to make good on his promise of profitability fast and dissuade fears over the market’s viability. Only then could he meet his aim by making anyone regret selling.