March 14, 2021

Thesis - DraftKings is a leader in online fantasy sports and sports betting. The company has 3 primary business units. The first is its daily fantasy sports business. Founded in 2012, DraftKings initial innovation was turning fantasy sports - where you pick your own virtual team based on real life players - into a daily game. In doing so, they captured the engagement of sports fans, who could wager money based on the outcome of their virtual team’s games. As fantasy sports is considered skill-based, its a legal business in the US and allowed DrafKings to get a hold in the market. Their second unit is sports betting. This is driving much of the excitement around the company due to the ongoing legalisation of sports betting and online gambling across the US. Currently, 15 states have legalised online sports betting, of which DraftKings sports book app is live in 12. The final business unit is iGaming - think online casino games such as black jack, roulette and slots. Here, 6 states have legalised iGaming and DraftKing is live in 4. The primary tailwind for the business is the continued legalisation of online gambling and the movement of the gambling market online. Morgan Stanley expects >75% of the sports betting market will be online by 2025. Investors believe the market opportunity could be $20bn annually by 2025 and up to $60bn on a longer time scale. Looking at competitors, DraftKings has had a jump start on the industry incumbents. DraftKings is primarily a digital-first business, whilst the legacy competitors are owners and operators of brick and mortar casinos. Since going public in 2020, the stock is up almost 7x.

Financials & Performance - DraftKings announced Q4 revenue of $322 million, a 98% increase versus Q4 2019. For the whole year, they delivered $644m in revenue, which was actually $95m more than they guided for. This is terrific performance when you consider the sporting calendar was disrupted by covid-19. The company revealed they have 30% of the online sports betting market and 19% of the iGaming market, based on revenue figures. The business has gross margins of 43%, although you might expect this to decrease over time as the growing sports book business has lower margins than the fantasy sports business. They have also been continuing their impressive run of partnerships. Last month, they announced a deal to become the exclusive sports book partner for the UFC, one of the fastest growing global sports, in addition to the Dish TV network. This is on top of a number of existing partnerships, including ESPN, NFL, PGA Golf and many individual teams.

Leadership - DraftKings was founded by Jason Robins, Matthew Kalish, and Paul Liberman who met whilst working together at Vistaprint. All 3 are still on the leadership team today. Jason Robin is the CEO and well-regarded, with a 97% approval rating on Glassdoor.com.

Risks - The addressable market of the business is dependent on the continued legalisation of online gambling in the US. The business continues to deal with regulators and expansion in a conservative way. In addition, whilst incumbents have been slow to react, they are now investing heavily in online and have the resources to do so. Penn National Gaming is perhaps the most interesting. They have a large footprint in traditional retail gambling and and acquired a large stake in Barstool Sports, a competitive online sports book.

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Written by Stevan Popovic, growth investor, web developer and founder of this site.