DraftKings Stock Drops Amid Growing Questions About Profitability

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DraftKings stock

DraftKings stock fell 22% Friday morning as the company’s Q4 results prompted concerns about its path to profitability.

DraftKings provided an EBITDA outlook for FY22 for the first time, projecting a loss of $825-$925 million.

That is a roughly $100 million increase from the already-chunky $676 million EBITDA loss in FY21.

Bloomberg Intelligence analyst Brian Egger noted that guidance was $300-$400 million worse than consensus expectations.

Where is DK cash going?

DraftKings attributed much of those forecast losses to costs from launching in New York and Louisiana in January.

If zero new states had launched in 2022, DraftKings would have been EBITDA-positive in Q4 2022, the company said. As it is, DraftKings is aiming for EBITDA-positive in Q4 2023.

The company spent close to $1 billion on sales and marketing in 2021.

System works, send more cash

CFO Jason Parks dismissed concerns about the projected losses, saying:

“It is clear the business model is working. We feel terrific about customer payback and the EBITDA projections.”

He stressed DraftKings was still in growth mode, and mature states were already turning contribution-positive.

DraftKings said each state takes two to three years to become profitable.

Tough questions for DraftKings stock

Analysts on the subsequent Q&A call also took a more probing stance than previous calls, with one asking Robins why insiders were not buying stock.

Robins said he and other execs had been exercising options, which was equivalent to buying shares.

Morgan Stanley analyst Thomas Allen also asked Robins whether DraftKings would need to raise more capital, given the forecasted cash burn.

Robins said DraftKings’ current plan did not include another capital raise. The company has around $2 billion on the balance sheet.

What else did we learn from DraftKings Q4 results?

Robins said New York sports betting was off to an exceptional start, with DraftKings Sportsbook acquiring 300,000 users in the first thirty days.

He said that was around 2.3x quicker than other states, even after adjusting for population size. 

When asked about profitability in New York, Robins said there was some “chatter” about reducing the 51% tax rate.

“We are waiting to see,” Robins said. “We’ll adjust accordingly. Customer acquisition has been so efficient and the early cohort so strong, we are hopeful with an appropriate tax it can be a very profitable market. If not, we will make necessary adjustments.”

But the chatter about lowering the tax rate might be just that. Indeed, NY Assemblyman Gary Pretlow has introduced a bill to prevent the tax rate being lowered.

Can social betting help DraftKings stock?

Robins also provided an update on DraftKings Social, which the company started rolling out last year.

Robins said the number of users sharing bets was up 67% between Q3 and Q4. Going forward the company will launch a streaming feature for players to ‘go live’ and discuss their bets.

DraftKings stock was last down 22% to $18.