DraftKings announced last Thursday (April 23rd) that shareholders had approved the company’s ‘business combination’ with SBTech and Diamond Eagle Acquisition Corp. (DEAC). DEAC agreed to pay $2.7 billion in “cash and stock” for DraftKings ($2.055 billion) and SBTech ($645 million) in a transaction designed to take the DFS turned sports betting company public (DEAC was already listed, so DraftKings was able to avoid filing for an IPO in a difficult environment). Shares of the vertically integrated (see: backend technology, trading platform) ‘pure-play’ sports betting and online gaming operator began trading on the NASDAQ exchange, under the symbol DKNG, last Friday morning (April 24).
Howie Long-Short: Going public during the sports hiatus may not be ideal for a sports betting operator (DraftKings’ only real source of revenue right now is their New Jersey online casino business), but Gavin Kelleher explained that “most people understand the shutdown is only temporary and that the games will return sooner than later.“ The Goodbody Gaming & Leisure Analyst said with revenues likely to “come back on stream before the end of the second quarter,” there was no reason for DraftKings to hold up the reverse merger. It appears as if the company made the right decision. DKNG shares are up +11% (to $19.52 at Monday’s close) since being listed.
Sure, skyrocketing unemployment numbers are bound to depress DraftKings’ revenues once the pro sports leagues resume action – at least relative to pre-COVID projections – but Kelleher still anticipates the company experiencing “very strong growth” through 2021. The Ireland-based analyst reminds that sports betting remains a nascent industry in the U.S. and thus “all of the revenue generated is incremental.” He also suggested that because “fans won’t be going to games (for at least a period of time), there is bound to be more live sports on television.” Historically (see: in established sports betting markets), live sports on television has proven to be a key driver of activity for online operators.
With a valuation north of $6 billion on less than $400 million of revenue – and with no profits (the company reported +/- $140 million in ’19 losses) – DraftKings is currently trading more like a technology co. than a gaming outfit (15x FY19 proforma revenues). Kelleher suggests the market’s outsized interest in DraftKings is being driven by “the belief the U.S. sports betting market will be worth a significant amount of money within a five year period (perhaps as much as $20 billion) and that [DKNG] will control a large portion of the overall market share.” The fact that DraftKings is the only publicly traded vertically integrated ‘pure-play’ U.S. sports betting operator and that there is a lot of money eager to back companies in the space certainly hasn’t hurt.
Confidence in DraftKings’ ability to acquire consumers is based on the company’s well-established brand and large DFS user base (4+ million active across 43 states). Having an established audience to market to gives DKNG the opportunity (product and technology also matter, so it’s not assured) to acquire sports bettors at a significantly lower cost than their peers (FanDuel excluded). Thus far, the ability to operate more efficiently than the competition has proven advantageous for both DraftKings and FanDuel. Kelleher points out that “the DFS operators hold a tremendous amount of market share in nearly all U.S. markets with online sports betting.”
Considering “FanDuel is the number one online sports betting operator in the U.S.” (based on performance, assets and experience) and that Flutter Entertainment (the parent co., trades under symbol FLTR:LN) – which also owns Betfair, Paddy Power, Sportsbet and TVG (and is FCF positive) – will only trade at 12-13x EBITDA post-merger with The Stars Group ($16.3B market cap), it’s fair to wonder if DraftKings is overvalued. Kelleher doesn’t think so. He said he would “come at it from the perspective of Flutter being undervalued. Not only does FLTR give investors exposure to the best horse in the U.S. sports betting race, it’s geographically diversified which reduces concentration risk.”
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