Feb 21: DraftKings: analysts cool as shares slide

DraftKings analyst reaction, New York and Louisiana data, startup focus - BetDEX, +More

Earnings+More

Feb 21, 2022

Good morning. On today’s agenda:

DraftKings gets a going over from the analysts.
There is more data to digest from New York and Louisiana.
Startup focus is on BetDEX, the new blockchain-based betting exchange.

Gimme some of that old moonstomping. Click below:

DraftKings analyst reaction

Weather report: The share price reaction on Friday to DraftKings’ Q4 earnings call told its own story. The 22% fall on the day, as the analysts at CBRE said, points to the market was “caught off guard” by forecast EBITDA losses of between $835m-$925m, some 50% lower at midpoint than consensus.

The widening forecast losses - partly due to what Credit Suisse said was the “magnitude’ of the New York launch, but also increased fixed costs in product and tech - was clearly not the message some investors had been expecting.

CBRE analysts: “The price action today reflects disappointment from some investors holding out hope for an accelerating path to profitability.”

Balancing act: Credit Suisse says DraftKings’ CAC formula is “becoming more efficient” and that it is now paying “slightly less” per customer coming through the doors, but that there are more of them. ”Thus the magnitude of the expense is higher,” the CS team added. “But that likely creates a faster ramp on the EBITDA profitability side once through the major ‘onboarding’.”

Delayed gratification: The team at Macquarie said on Friday DraftKings “has always been” a long-term story. But while marketing spend will come down “over time”, the path to profitability “appears longer than initially expected”.

Date for the diary: CBRE put a date on this longer pathway. DraftKings management may be talking about reaching EBITDA profitability in Q423, but CBRE believe there is a chance it won’t “meaningfully” hit profitability until FY25. Truist analysts have a Hold on DraftKings until they have “more profit visibility”.

Actual date for the diary: DraftKings’ investor day is March 4.

Song remains the same: Deutsche Bank said the unsurprising share price reaction is in part about investors tiring of the beat/raise-revenue strategy that worked in the early stages of the OSB story in 2020.

Deutsche Bank: “But, when coupled with widening adjusted EBITDA losses, and more realistic/discerning investor approaches, it is simply not suitable in the current environment.”

Aging bull: Moreover, the analysts add, the basis of the bull case might also be out of date. “We simply believe the out-year TAM forecasts are too high, for several reasons, and the margin targets that underlie these forecasts are also too high.”

On the block: Ultimately, if management fails to lift the depressed share price, CBRE made the point that DraftKings ultimately becomes a target.

CBRE analysts: “The asset would be highly desirable to an array of strategic/financial buyers that we think puts a floor on the downside.”

On Wagers.com: DraftKings 10-K reveals true scale of losses.

What we’ll be listening to: Ryan Butler is set to discuss DraftKings on Wagers Wonks this week.

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BREAKING NEWS: Malta-based affiliate KaFe Rocks has been bought by gaming operator and games provider Glitnor Group for an undisclosed sum. It is Glitnor’s first venture into the affiliate marketing space. As part of the move, KaFe Rocks founder Feda Mecan will join the Glitnor board while CEO Simon Pilkington will also join the management team. Glitnor’s current B2C business includes the Lucky Casino and Gambola brands.

New York wk.6

The Bowl cut: The latest data from New York included Super Bowl LVI wagers. Handle was up 31% on the previous week to $472.1m, while revenue was down 39.7% to $15.4m. The team at Wells Fargo said the GGR figure implied a low hold of 3.3%. The low margins were reflected by FanDuel and BetMGM ending the week with negative GGR of -$2.7m and -$400K respectively.

The movers:

⬆️ DraftKings share of handle was 25.7% vs. 24.2% the prior week at $121.5m, GGR was $11.3m (73.6% share).

⬇️ Caesars share of handle was 22.7% vs. 24.2% the prior week at $107.2m, GGR was $5.8m (37.8% share).

⬇️ BetMGM share of handle was 9.2% vs. 9.5% the prior week at $43.3m, GGR was -$0.4m, implying hold of -0.8%.

⬇️ FanDuel was -17.7% in GGR share vs. 26% the prior week.

⬆️ PointsBet was up to 5.7% in GGR share ($900K) vs. 0.7% the prior week.

Taxing times: In their post-earnings note on DraftKings last week, the Deutsche Bank team poured cold water on the proposition put forward by CEO Jason Robins that a tax cut would be on the agenda in New York. They cited three main objections.

One, instances of states lowering taxes are few and far between;
Two, the market is only five weeks old;
Three, the operators literally bid for the existing tax rate.

Deutsche Bank: “We see the potential risk of tax increases in several other states as far more likely than a reduction in New York, and as such, we view the tax dynamic as a far greater risk than opportunity.”

On Wagers.com: Tax rates - OSB operators hope for the best.

Louisiana

Jan22: OSB generated $40.5m in the first four days after launching on January 28. Net revenue came in at a $9m loss after deductions for promo credits. In its third month of operation retail sports betting net revenue came in at $5.3m on $49.3m of handle, implying 10.8% hold. In land-based gaming, GGR was 0.3% up vs. Jan19 and -12.4% MoM to $188.2m.

Pennsylvania

Jan22: Handle was up 29% YoY and +6% MoM to $793.7m, GGR was up 8% YoY and +41% MoM to $53.4m, implying margins of 6.7%, Wells Fargo said. OSB GGR was $47.6m, retail GGR was $5.8m. Promo spend came to $21.2m or 45% of OSB GGR vs. $19.1m in Dec21 and $21.3m in Nov21. Total NGR after promo deductions was $32.2m. Online casino GGR was up 35% YoY and +6% MoM to $108.3m, daily GGR was up 6% MoM to $3.49m.

Online sports betting and casino aggregate share of GGR:

🥇FanDuel: $39.5m GGR, 28.2% share,

🥈Rush Street Interactive: $29.7m, 21.2% share,

🥉BetMGM: $22.5m, 16% share.

Retail casino GGR was up 28.8% YoY and down 3% vs. Jan19 to $246.7m.

Startup focus - BetDEX

Who, what, where and when: BetDEX is a decentralized betting exchange being built on the Solana blockchain by Nigel Eccles and fellow former FanDuel founders Varun Sudhakar, CEO at BetDEX, and CTO Stuart Tonner. Formed late last year, the company is based in Edinburgh, Scotland.

Funding backgrounder: At launch the company raised $21m in Seed funding from San Francisco-based crypto-fund Paradigm and crypto exchange FTX. “We’ve got all the money we need,” Sudhakar tells WE+M.

So what's new? The first step for BetDEX is to produce version 1 a decentralized blockchain-based platform which Sudhakar says will be ready in a few weeks with a beta version launchd in the next few months. The aim is then to launch in June.

Sudhakar: “If you fast forward six months, if things go according to plan, the backend layer will be launched and the ownership will have been given away.”

Key quote: “Our betting exchange will be a shining beacon of what you can do on the infrastructure.”

The longer pitch: BetDEX has Betfair firmly in its sights, says Sudhakar, with the BetDEX team set to build the first application on the platform. “That will be a betting exchange and gaming operator with a focus on international markets,” he says. “The exchange will be genuinely P2P. From a sports-betting user's mindset, if I’m placing a wager on Betfair, I think the product is quite poor. The interface, which was built for horse-racing betting, hasn’t changed in 20 years.

Sucks to be you: “The product sucks,” he adds. “But if you try another exchange - Smarkets, for example - they have better UI and better rake rates but their problem is they have even thinner liquidity.”

Sudhakar says that creating a global clearinghouse will allow his company, and other independent developers, to work on front-end solutions.

Sudhakar: “I think realistically, it will be the tier 2 and 3 books as well as startups. And the others will be independent developers who might want to build a sports prediction exchange. We’re already having conversations there.”

The week ahead

Caesars Entertainment reports on Tuesday where the focus of attention will be on the group’s ongoing digital plans. It kicked off New York OSB with a $3000-bonus boosted leadership in share of handle, but dialed down the spend back in the following weeks and its most recent NY share handle figure dropped to 22.7% from 24.2%. On Wednesday it’s VICI Properties, FuboTV and the first of the major affiliates, Catena Media. Rival Better Collective reports the following day, along with Bally Corporation (where the recent takeover approach will be top of the agenda) and Playstudios. GLP and Churchill Downs close the week.

The shares week

While DraftKings’ slide on Friday grabbed the headlines, the rest of the sector also had another bad week, with Rush Street Interactive suffering the worst, down 15.5% for the week. Also not having the best week was DraftKings’ rival Flutter Entertainment, which was down low single-digits over the week. But a comparison of performance between the two in the past 12 months shows that they were somewhat tracking each other until September, at which point a clear divergence in favor of the UK-listed group emerges.

Newslines

Clean stream: Sports-streaming provider DAZN has agreed on a refinancing which has seen its main shareholder Access Industries, founded and chaired by Leonard Blavatnik, convert preference shares and retire shareholder loans in exchange for $4.3bn of new shares. It means DAZN is now debt-free. The new backing comes in the wake of DAZN’s failure to complete a deal to buy BT Sport.

Ömer and out: Founder of the struggling Bet-at-home Franz Ömer will leave the company as of the end of this month “at his own request”. He will be joined at the exit door by co-CEO Michael Quatember. Marco Falchetto has been appointed as a new member of the management board.

Power ahead: Golden Nugget has launched its DraftKings-powered sportsbook in Arizona, its first sportsbook on the SBTech platform. Meanwhile, the company has also signed up with Strive Gaming for the provision of a PAM solution in Arizona and, pending regulatory approvals, in Ontario.

Incentivized: FanDuel has partnered with Incentive Games to launch a selection of free-to-play games in the North American market.

Back a winner: Aspire Global has agreed a full backend supply deal with esports-betting operator Win, the company behind esports media site gg.com, for the winners.bet esports-betting site.