Analysis: Is DraftKings Really Worth $6 Billion After SBTech Merger, Nasdaq Listing?

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DraftKings is officially a public company, and the public appears to be a huge fan of the combination with SBTech.

DraftKings‘ initial market cap of $6 billion presents an eye-popping number for many to process.

For comparison, FanDuel parent company Flutter is currently valued at around $9.5 billion. That’s despite having a larger share of the US sports betting market and a global business that kicked off more than $500 million in profit in 2019. DraftKings/SBTech, meanwhile, lost around $137 million combined.

It’s difficult to exactly pull out the exact value of FanDuel from within Flutter, as the business has many moving parts on multiple continents. However, one equity analyst contacted by LSR said his model priced FanDuel at least 25% lower than the current DraftKings valuation

Paying a premium for DraftKings?

Another comparison might be PointsBet, which is also online and US-focused, albeit with some Australian and retail aspects.

Using Bell Potter’s forecast of $47m revenue in FY 2021, PointsBet trades at an EV/2021E revenue multiple of 5.7x. DraftKings is some 38% higher at 8.1x (using its own 2021 projection of $700m revenue).

In other words, the market is granting DraftKings a major premium to its closest peers. As Sports Illustrated business columnist John Wall Street put it: “DraftKings is currently trading more like a technology company than a gaming outfit.”

The “tech” label is in line with how DraftKings has marketed itself since its inception and around the Nasdaq listing itself. The pitch is for a pure-play US betting company that owns its entire tech stack.

But the tech label might be a misnomer.

Network effects for tech companies

Technology companies trade on lofty multiples because of the potential of their network effects. Zoom is the latest example of this.

If one person sends you a Zoom link to join a meeting, you are now a Zoom user. That spreads exponentially. Zoom’s daily active users have jumped from 10 million to more than 200 million during the coronavirus pandemic.

Amazon is one tech giant farther down this exponential road. Because of its scale, retailers need their products to be on Amazon. The company, therefore, can negotiate favorable rates and commissions for itself. Meanwhile, the site can stock a massive range of products at lower costs for the consumer.

Consider Google and Facebook. Together they attract 70% of the US market for digital ads. They are such important sources of traffic that if they raise their prices, advertisers essentially have to grin and pay it.

Big tech, in other words, trends towards monopolies. However, it’s yet to be seen that this is true in online gambling.

No ‘Amazon of sports betting’

Look at bet365. If any company is the so-called “Amazon of sports betting,” it is bet365. The company frequently is rated as the most powerful online gambling company in the world.

Broadly speaking, it aims to be best-priced on major events, or close enough that there is no reason to bet elsewhere. It has the widest range of markets, events, and live streaming in the sector. It owns proprietary technology, has billions in the bank, and all the benefits of scale.

And yet, it still only accounts for around 20% of the UK betting market.

“There is no network effect in sports betting,” says Eilers & Krejcik analyst Alun Bowden. “There is no easy link you can send someone to make them a user. They have to go through sign-up hoops. They have to fund the account. They have to pass KYC (Know Your Customer) checks. That’s a lot of persuading that needs to be done. There is a reason affiliates exist.”

Not everyone must have one

Simply put, your friend doesn’t need a bet365 account just because you have one.

Bowden adds: “There is no material advantage to the end-user from a sports betting monopoly and no structural reason for one to exist.”

In fact, it’s arguably the opposite. Users are incentivized to have as many accounts as possible to earn sign-up bonuses and to access better odds.

Two sides to every argument

Of course, the US sports betting market might yet evolve to be more oligopolized than its European counterparts. And DraftKings could be a big winner if that were the case.

In an initiation note this week, Morgan Stanley (MS) put a $23 per-share price target on DraftKings, implying a further 20% upside from its early trading price.

And the analyst firm made some aggressive assumptions in its forecast. Those started with an addressable market of 38 sports betting states by 2025, including 11 states with iGaming.

Is DraftKings getting to a 20% share?

MS also calls for DraftKings to take a 20% share of the US betting market. That’s the same share bet365 has in the UK now, where it is the market leader. Therefore 20% more likely represents a ceiling for DraftKings rather than a base case.

Likewise, MS calls for 28% EBITDA margins. That mark would be eight percentage points higher than Flutter managed in 2019.

There is no also recognition of the operational risk of migrating to the SBTech platform, the type of migration that has slowed many gambling growth stories in the past.

DraftKings could yet live up to its expectations. But there’s more uncertainty here than the market currently reflects.