Are Investors Overreacting To DraftKings’ Continued Unprofitability? – OnlinePokerReport.com

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DraftKings stock dropped nearly 22% on Friday, after the companys Q4 2021 earnings call. Investors werent happy that the companys leadership intends to continue spending heavily on marketing and promotion while the business has yet to achieve profitability.

Chatter began immediately on social media about which online gambling operator will replace DraftKings at the top of the heap.

As is often the case, there has been a partial rebound since the drop. Markets were closed on Monday, but DraftKings rose nearly 8% in Tuesday trading, and has made smaller gains today.

Online Poker Reporthas often referred to DraftKings as a member of theBig Three.By this, were placing it alongside US online casino market leader BetMGM and Americas online sportsbook heavyweight FanDuel. With DraftKings now trading at less than one-third of its March 2021 high, theres a temptation to remove it from that elite group. However, that would be premature.

Other than BetMGM, which started its marketing and promo race with competitors at a significant brand recognition advantage, most viable competitors are spending at a rate almost as high as DraftKings. Somewhat smaller competitors, like Rush Street Interactive (RSI) of BetRivers fame, may spend more rationally and were favored by social media commenters. However, almost no US iGaming stocks have been untouched by recent corrections, as investors have been spooked across the board.

Meanwhile during last months investor update filled with similar questions from analysts, even BetMGM didnt promise to become profitable until 2023.

Sure, Jason Robins DraftKings co-founder, CEO and board chairman sounded a bit like actor Michael J. Foxs character in the 1987 hit movie, The Secret of My Success. Protagonist Brantley Foster embodied the 80s zen with: We gotta expand!

On Friday, Robins said DraftKings is spending a lot, but pointed out that it has also doubled in size.

The 2021 annual report shows revenue more than doubled vs. 2020. DraftKings sales and marketing expenditures nearly doubled, as well.

In 2021, DraftKings revenue of nearly $1.3 billion exceeded its sales and marketing expenditures by $314.5 million, according to the annual report. In Q4 2021 alone, DraftKings generated $473 million in revenue.

Still, the online gambling leader spent $981.5 million on sales and marketing during 2021.

So on Fridays earnings call, analysts kept asking when DraftKings will be profitable. The answer they got was that DraftKings will keep doing what its doing.

DraftKings CFO Jason Park said:

It is clear that the business model is working.

So, is DraftKings resisting calls to change? Yes and no. Robins and Park said theyre sticking to their business model, but that its built to accept change. That is, their strategy will change over time, because the model evolves along with the market.

By their reasoning, if DraftKings were to curtail marketing and promotional spending at this point, it wouldnt be responding to changes in the landscape.

Robins insisted that the company would be on course for profitability by Q4 this year, if no further states were opening up.

However, DraftKings cant stand still just to rein in spending, he said. It also means DraftKings has to spend money to acquire customers in new markets, as well as retain gamblers in mature markets, Robins said.

So last month, DraftKings Sportsbook launched in Louisiana and New York. This month, its commercials aired throughout the Super Bowl, with an actor wearing somewhat 80s goth fashion.

On April 4, DraftKings plans to enter the Ontario iGaming space when that Canadian province allows private operators to launch. Later this year, the company is looking to launch online sportsbooks inMaryland, Puerto Rico and Ohio.

That will add to the online casinos DraftKings now operates in five states and the mobile sports betting it has in 17.

Meanwhile, new states take two to three years to pay back startup expenses, he said.

Park added:

As a reminder, our primary use of capital is to fund state launches.

Indeed, the highest costs come at the brand awareness and customer acquisition stage in each new state. Local advertising costs more than national commercials, but needs to happen in new states, Robins said. Those customers are worth the money, though, because theyre the strongest cohort, he said.

Then once markets mature, costs lower. Park says states where DraftKings launched between 2018 and 2020 will become profitable during 2022.

DraftKings can then move to national ads for continued brand awareness and retention efforts, can lower customer acquisition costs and is able to use player data in its customer relationship management (CRM) system to cross-sell its products to existing users, they said.

DraftKings wont have the costs it incurred to onboard tech talent in order to compete on product with international online gambling operators. Those personnel created products in-house that are already making DraftKings more efficient, Robins said. He added that another reason DraftKings can evolve products quickly is that its focused almost exclusively on the US.

Park noted that the in-house betting engine has already helped the bottom line.

The DraftKings Casino game built in-house, Rocket, is performing well in Connecticut, Michigan and New Jersey, Robins said.

Plus, the $1.6 billion Golden Nugget Online Gaming (GNOG) acquisition is slated to close this quarter, Park said.

Additionally, if New York doesnt lower its 51% tax rate on online sportsbooks, DraftKings may lower spending in the state so that it becomes profitable for the company in the usual two to three years, Robins said. PlayNY reported on Thursday that DraftKings Sportsbook came in third in gross gaming revenue during January, behind Caesars Sportsbook and FanDuel Sportsbook.

DraftKings provided itself with an excuse if it fails to become profitable.

On page 20 of its annual report, DraftKings included a lengthy series of caveats, beginning:

DraftKings has a history of losses and we may continue to incur losses in the future. Since DraftKings was incorporated in 2011, it has experienced net losses and negative cash flows from operations. We experienced net losses in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) of $1,523.2 million and $1,231.8 million in the years ended December 31, 2021 and 2020, respectively. We may continue to experience losses in the future, and we cannot assure you that we will achieve profitability.

The text goes on to caution that the company may continue to lose money in future periods and for many reasons, both foreseeable and not. It then concludes on a rather grim note:

If our expenses exceed our revenue, our business may be negatively impacted and we may never achieve or maintain profitability.

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Are Investors Overreacting To DraftKings' Continued Unprofitability? - OnlinePokerReport.com