DraftKings vs. Barstool Sports: Who Is Ready To Win

 Last we wrote about DraftKings (DKNG) they went from $41 to $62 and now they are back at $52. With the stock up 62% in the last 12 months, and down 16% in the last 6 months, there sure has been a lot of volatility on their path upwards. While the stock has seemingly fallen out of the limelight, the company is still growing like crazy. We therefore decided to look underneath the hood again and see why the gap is widening between the stock and the company's performance.

What did we discover?

We discovered a handful of some really interesting insights. The first is that many investors are cautious between who will win the fight (them vs. Barstool Sports) for the market share of young gamblers across the world.

In addition, there are also 4 key financial takeaways we've summarized below. We've included our interpretation of them too!

DraftKings vs. Barstool Sports

• As of last year 50% of people who use online sports betting websites, responded that they use/have used DraftKings while only 15% said the same for Penn/Barstool Sport's services.
• DraftKings will make well over $1B in revenue this year. While Barstool is miles away from generating this type of revenue, they do generate 8M monthly listeners via their publishing platform. It is hard to predict at what rate they can convert listeners to users, but assuming a conservative annual conversion rate of 1%, that would be 80K users per year. Comparing this against DraftKings user growth, we see this taking years to catch up.

While the comparison to Barstool is very important to watch, the takeaway is that both companies are operating on totally separate playing fields. Factor in, that PENN does billions of dollars in revenue, and only owns 35% of Barstool, and Barstool will likely take years to actually impact their bottom line.

However, the real key to our continued investment thesis is due to the below.

3 Key Takeaways:

• The first takeaway is that while the company is performing extremely well, there is much skepticism in the market that the competition in this space is way too stiff. Therefore many investors are taking the view that the company will struggle forever in their ability to create a profit.

Our view: We believe this is overblown.

This is in large part due to their recent earnings announcement where they beat EBITDA expectations by $20M when they came in at -$95M vs. $115M. This is only the second EBITDA beat DKNG has ever hit and while they are still in the red, this is a strong trend in the right direction. We believe DKNG is making the necessary moves to come out on top in this space, and will eventually get to profitability as more and more of the world re-opens.

• The second takeaway is that while projected profitability can be debatable, revenue growth is not.  This is because DKNG reported their 2Q earnings with revenue coming in well ahead of the consensus expectations. When looking at the numbers we see that their 2Q revenue was $298M (much higher than the $247M that was anticipated).

Comparing this back to their historical comments, we see that DKNG's management team expected revenue anywhere between $221M & $242M. When we see that the actuals crushed their own team's expectations last quarter, we view this event as extremely encouraging. This means that the company is growing faster than even they thought! This has happened several times now and is a strong indicator to look for.

• The third key takeaway is what came of this outperformance. During the earnings call their management team further raised their revenue forecast too $1,210-$1,290M from $1,050-1,150M. This comes on the heels of not even forecasting any in additional revenue from the legalization of gambling in certain states.

This signals two major things to us. The first is that, DKNG is expecting higher revenue per state than originally thought. With this being the case, DKNG is saying that they expect both LTV (lifetime value of their customers) to be higher as well as (potentially) margins. LTV is how much revenue they expect from each client over the course of their lifetime with the company. If this number is increasing this means that they expect to receive more $$ per customer. This is an awesome sign which signals that if member growth stalls, they will still have revenue growth amongst a handful of other positive signals. Additionally if margins are increasing, that is another sign that they are on a path to profitability.

Wrap-up:

These three takeaways signal that we still have full confidence in our DraftKings stock selection. While the stock has taken a hit in the last 6 months, we believe these three points above, warrant further holding our position.

Right now, in addition to investor worries, the macro headwinds affecting growth stocks are also taking their toll on stocks like DraftKings. So, we are setting our target date as long term and are waiting for these headwinds to go away, therefore allowing the stock to resume its upward path. We are also lowering our price target amidst the headwinds and will monitor DKNG's volatility over the coming months before re-adjusting it upwards.

Ticker: DKNG

Rating: Overweight

Price Target: $65 (lowering price target)

Target Date: 12 months