DraftKings Needs a Growth Strategy or a New Story for the Public Markets

DraftKings Needs a Growth Strategy or a New Story for the Public Markets

DraftKings (NASDAQ: DKNG) has been on a tear. The company overtook FanDuel as the U.S. market share leader in October (at least by one key metric, top line revenue) and recently reported revenues rose 57% YoY to $790 million in Q3.

Its share price is up ~250% YTD.

But heavy is the head that wears the crown (DraftKings logo pun intended). The recent success has brought upon a new challenge. Where does a high growth company that has long chased the online sports betting market leader go from here?

New states, online casino, and international expansion all remain possibilities.

But the surest bet is to “turn back to what it can do with the core market, the core product, to bring in more consumers and to find more ways to expand wallet share with those consumers,” Chris Grove (partner emeritus, Eilers & Krejcik Gaming) said.

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Sports betting in the U.S. remains in the early innings. But DraftKings overtaking FanDuel in the market is noteworthy because it reflects where momentum lies.

DraftKings has taken market share from FanDuel. The company has also seemingly made some additional share too.

The market share increase is the main reason for the company’s YoY revenue growth. But the continued strength of DKNG’s casino business and improvements in its underlying product were also factors.

One of the main reasons DraftKings’ stock has performed so well over the last ten months is that the company has managed the market successfully.

“Consistent beats. Underpromising. Overdelivering,” Grove said.

It did so again in Q3 (see: expected revenues $706.8 million)

The company has also benefited from being the only at-scale pureplay sports betting company in the U.S.

But DraftKings’ story for the last three years has largely been about growth, momentum, and unseating the market leader. Now it is the hunted, the market is about to get more competitive (see: entrance of ESPN Bet, Fanatics Sportsbook), and the most logical catalysts for future growth all have question marks.

New states?

“We’ve been knocking on the door in California for almost two decades now. In Texas, for almost a decade. No joy,” Grove said. “The states that are left, are left for a reason.”

Online casino?

“A decade of unqualified success for online casino in New Jersey has failed to generate the momentum the industry hoped for. Only two states with significant population have authorized casino since New Jersey's launch,” Grove said.

International expansion?

The concept runs counter to DraftKings’ current U.S. pure play narrative, and is not certain to be successful. The international markets are tough terrain for a new entrant to try and traverse.

So, it’s not clear how much longer the company will be able to run with the growth story. DraftKings may need to find new new avenues to maintain its current narrative.

Grove believes DKNG is most likely to find those lanes by addressing some basic blocking and tackling questions.

“How does the company deliver more users to its core sports betting product, and how does it get them to spend more money more often once there,” he said.

A multi brand strategy, like DraftKings employs on the casino side, could be one potential solution to grow the pie.

“Honestly, someone ought to do that soon,” Grove said. “Because the idea that a single brand can appeal to the 100 million plus sports fans in the U.S. doesn’t track.”

Another would be for the company to alter the dynamics of what a sports bet looks like and how people engage with it.

“When you start making sports betting [look] more like a casual mobile game, or position it closer to entertainment than betting, maybe you can start drawing more from the non-gambling wallet of a typical consumer,” Grove said.

For context, U.S. consumers spent $41.7 billion on mobile games in ’22.

Same game parlays can be considered a step in this direction.

Operators may also be able to incentivize players by broadcasting sporting events in app. 

“Maybe people expand the money they’re willing to bet because this no longer feels like betting, so it can draw from their entertainment budget,” Grove said. “They could spend $7/mo. on a streaming service or mobile game, or wager a few bucks to unlock new features, games, or content at DraftKings.”

Or operators can give bettors more events to bet on.

“Maybe it comes down to the calendar that you can offer consumers and how many hours a day, days a week, weeks a month, and months a year players can engage with the platform and find something of interest,” Grove said.

There is evidence suggesting gamblers will wager on sports outside the big five. Colorado reported $12 million plus in table tennis handle in August.

If DraftKings is unable to keep up the rapid growth it will need to come up with a new story.

To be clear, that does not mean the company is, or will be, any less valuable. It will just be a fundamentally different conversation and one that will need to be managed to the satisfaction of the public markets.

Of course, investors have not yet shown they understand how to properly value gaming companies.

“The market has misunderstood online betting in both directions since the repeal of PASPA,” Grove said. “Far too enthusiastic, then far too pessimistic.”

Remember, there was a time when DraftKings’ stock was worth more than $70/share. There was also a time when it sputtered under $10/share. Today shares are worth ~$38.

Public market investors have also been “ignorant about the size of the opportunity and the underlying economics of these companies,” Grove said. And they have been “wrong consistently about the pathway for legalization in additional states for both online sports betting and online casino.”

In other words, public market investors may not be the right proxy.

But they're the proxy that matters if you're a public company.

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