We came across a bearish thesis on DraftKings Inc (DKNG) on ValueInvestorsClub by Fletch. In this article, we will summarize the bears’ thesis on DKNG. DraftKings shares were trading at $45.80 when this thesis was published, vs. closing price of $33.89 on Aug 29.
A digital kiosk showing the diverse range of sports betting options available.
DraftKings Inc. (DKNG) has been a major player in the online sports betting (OSB) and iGaming industry, which has seen rapid growth in recent years. The company’s lead product, its sports betting platform, offers users a wide range of betting options, including parlays and in-play betting, which have become increasingly popular. DraftKings’ primary source of revenue comes from its sports betting operations, which generate money through the margin between bets placed by users and payouts. The company has also ventured into iGaming, offering online casino games, and has a growing presence in daily fantasy sports, where it originally built its reputation. The company’s key markets include the United States, where it has been expanding aggressively as states continue to legalize sports betting, and it faces competition from other major players like FanDuel, BetMGM, and Caesars.
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Despite DraftKings’ rapid growth and market share gains, there are significant reasons to consider selling its stock. One of the core issues with DraftKings is the sustainability of its business momentum. In 2023, the company benefited from several favorable circumstances, such as reduced competition due to competitors shutting down or scaling back marketing efforts, and the success of its parlay product, which significantly boosted its hold and market share. These factors led investors to believe in a rapidly expanding total addressable market (TAM), DraftKings’ continued dominance within that TAM, and the potential for margins to surpass expectations. However, these optimistic assumptions may not hold true in the long term.
The OSB industry, while lucrative, is also highly competitive with low margins. The U.S. market, in particular, lacks significant barriers to entry, resulting in numerous competitors vying for market share with little product differentiation. While DraftKings currently enjoys a first-mover advantage, this edge is likely to diminish as other operators improve their technology and offerings, leveling the playing field. The assumption that DraftKings can achieve 30% EBITDA margins, similar to monopolistic or oligopolistic software companies, may be overly optimistic given that mature markets in Europe have seen EBITDA margins in the high teens to low twenties.
Furthermore, 2023 was an exceptional year for DraftKings, but many of the positive factors that contributed to its success are unlikely to repeat in 2024. Several competitors, such as WynnBet, PointsBet, and Barstool, exited or scaled back their operations, leading to easy market share gains for DraftKings. However, this situation is unlikely to continue as new and stronger competitors, such as ESPN Bet and Fanatics, enter the market, while others like BetMGM, which pulled back on marketing in 2023, are poised to regain market share in 2024. Additionally, the parlay product that was a game-changer for DraftKings may not continue to provide the same level of advantage, as competitors enhance their offerings and erode DraftKings’ market share.
Another significant concern is the slowing momentum in state legalization of sports betting and iGaming. Key states that were expected to legalize in the near term, such as Maryland and New York, have faced setbacks, further dampening growth prospects. Moreover, the potential for increased taxes and data provider fees in key markets could erode margins, making it even more challenging for DraftKings to achieve its ambitious margin targets. The company’s recent acquisition strategy, including the purchase of Jackpocket, raises questions about its focus and the potential for overpaying for acquisitions that may not deliver significant synergies.
In conclusion, while DraftKings has shown impressive growth, the challenges ahead may lead to a deceleration in business momentum, which could shift investor focus back to the company’s financials and valuation. As competitors intensify and market conditions become less favorable, the stock could face significant downside risk.
DKNG is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 56 hedge fund portfolios held DKNG at the end of the second quarter which was 64 in the previous quarter. While we acknowledge the potential of DKNG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DKNG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.