DraftKings’ Jackpocket Purchase Shows Operators Need to Look Beyond OSB, iCasino for Growth

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DraftKings’ Jackpocket Purchase Shows Operators Need to Look Beyond OSB, iCasino for Growth

DraftKings (NASDAQ: DKNG) recently announced an agreement to purchase Jackpocket for $750 million.

Its acquisition of the lottery courier service should immediately be accretive to the top line and user database. The deal also removes a strategic piece from the board before a competitor can take it.

But the transaction reveals a difficult truth for U.S. operators too.

“The reality is all of these brands only have so much elasticity in terms of their appeal to consumers,” Chris Grove (co-founding partner, Acies Investments) said. “And their core products, online sports betting and online casino, have a ceiling in terms of how many customers will engage with them and how often.”

To maximize customer (and potential customer) LTVs, and subsequently shareholder value, gaming companies must evolve and begin to provide their users with a broader array of vertically integrated entertainment options.

“The more products and services you can put in front of the audience, the greater your opportunity is to capture more than your fair share of their gambling wallet,” Grove said. “Maybe you can even start to draw from their entertainment budget.”

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The desire for continued growth is behind DraftKings’ latest purchase. 

“These are public companies,” Grove reminded. “They need to show increases in users, revenues, and EBITDA.”

The problem is new online sports betting (OSB) state launches have slowed, and there aren’t many states adding online casino right now, either. So, operators need to begin looking elsewhere for that growth. 

It makes sense that DraftKings is beginning with a lottery courier service. 

“It’s about as mass market as a gambling product gets,” Grove said.

~53% of Americans bought at lottery ticket in ’21.

And presumably, there are some synergies between the sports bettor/iGaming player and the lotto participant. DraftKings CEO Jason Robins said that bettors who had engaged with the lottery agent were worth 53% more in lifetime value than those who hadn’t. 

That does not mean investors should bank on the balance of Jackpocket users converting at comparable LTVs. The individuals already in both databases likely over-index because they are the most avid gamblers.

Jackpocket is the dominant player in the emerging lottery courier space. So, it was the obvious takeover target. The company, which has six million plus names in its database, generated $78 million in ’23. DraftKings expects that total to grow to $135 million in ‘24.

“There’s some ambition baked in,” Grove said. But “broadly speaking, those numbers feel realistic.” 

Lottery courier games are still only available to ~1/3 of the U.S. population and Jackpocket has a rapidly expanding product set (think: instant lotto).

State licensing challenges could prevent Jackpocket from hitting DraftKings’ aggressive projections. But it’s hard to come up with a scenario where this deal turns out to be a bust for DKNG.

“There are far more worlds where we look back in five years and mark this as a turning point acquisition,” Grove said. 

Jackpocket has a proven model, a demonstrable moat, and it is already operating at scale.

As a result, the lottery agent “has better chance to be profitable as a standalone business than any of the DFS companies ever did,” Grove said. 

Now imagine “the growth that could be generated by integrating it tightly within DraftKings’ online sports betting ecosystem,” he added.

DKNG should be able to leverage Jackpocket to take or extend its market share lead in several important markets (including NY and NJ). The company has shown to be more than capable of running a business that gives it access to a large database of gambling adjacent users and eventually converting those individuals into customers. 

New lottery players are cheaper to acquire than sportsbook users (DKNG indicated by as much as 80%). A greater percentage of the population plays the lotto, and there is less competition for their business. 

“So, marketing efforts can be more efficient,” Grove said.

Of course, lotto players are not as valuable, in aggregate, as sportsbook or online casino customers, either. 

At least, they haven’t been historically. DraftKings will try to change that using its data insights to cross-sell those individuals into other products and services. A conversion rate north of 10% must be considered success. 

DKNG might not be the only company pursuing the strategy. It’s reasonable to expect that other operators will look at competing lottery agents (though, none have a database as large). 

That’s, in part, because this deal will likely serve as a catalyst for sports betting’s next M&A wave. 

“When you have one of the leading companies planting a flag and saying, ‘we’re willing to spend hundreds of millions on acquisitions and we might just be getting started’, everyone else must look at that and say, ‘organic growth alone is probably not going to be enough to remain competitive, let alone if we have ambitions of overtaking DraftKings’,” Grove said.

The timing is also right for aggressive operators to make moves. There is finally some stability in the industry (think: in terms of upcoming state launches), and market share swings have begun to settle. 

The public markets have seemingly gained some confidence in the OSB opportunity too. So, investors may be more willing to underwrite acquisitions now than they were 6, 12, 18 months ago when they were irrationally focused on profitability.

“DraftKings has held an attractive valuation for an extended period of time now suggesting that the markets will once again reward growth,” Grove said.

DKNG shares are up more than 100% YoY. 

Other operators showing or forecasting profitability hasn’t hurt, either (see: FanDuel and BetMGM).

DKNG’s stock price has declined since the acquisition was announced (-~9%). But that’s not necessarily indicative of investors’ feelings about it.

DraftKings “had an earnings miss, so there’s a bit of noise in the reaction,” Grove said. And “most people don’t understand what lottery courier is. That could be part of it as well.”

The truth is anyone who was neutral to bullish on DraftKings prior to the acquisition and subsequently downgraded their opinion based on it does not understand what the company needs to do to win the U.S. market and/or to achieve a valuation that reflects its position.

“They’re misreading the path to long-term success,” Grove said.

The path isn’t the creation of another virtual blackjack table or slot game. It requires the introduction of vertical product sets.

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