Despite Q1 Beat & Raised Outlook, DraftKings Drops 8.9%

DraftKings Inc. (NASDAQ: DKNG) reported stronger-than-expected Q1 results. Driven by robust customer demand and negating inflationary pressures, DKNG exceeded both earnings and revenue estimates.

Additionally, the American daily fantasy sports contest and sports betting company raised its FY2022 guidance above analysts’ expectations.

However, despite the quarterly beat and raised outlook, shares were down 8.9% on May 6 to close at $13.15.

Q1 Beat

Revenues jumped 34% year-over-year to $417 million, and exceeded consensus estimates of $414.9 million.

The increase in revenues reflects a surge in average revenue per monthly unique payer (ARPMUP), which increased 11% year-over-year to $67, coupled with a 44% growth in business-to-consumer (B2C) segment revenues to $404 million.

In addition, the number of monthly unique payers (MUPs) grew 29% year-over-year to 2 million, driven by strong payer retention.

Furthermore, the company reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $289.5 million, better than the Street’s expected loss of $327.5 million.

Raised FY2022 Outlook

Based on continued strong customer behavior and optimization of the cost structure, management raised the financial guidance for FY2022.

The company now forecasts revenues to grow between 49% and 56% and to be in the range of $1.925 billion to $2.025 billion, versus prior guidance of $1.85 billion to $2.0 billion and exceeding the consensus estimate of $1.96 billion.

Further, adjusted EBITDA loss is likely to range between $760 million and $840 million, versus its previously guided loss of $825 million to $925 million.

CEO’s Comments

DraftKings CEO, Jason Robins, commented, “We are not seeing any impact from inflationary pressures on customer demand, and we continue to improve the user experience by adding breadth and depth to our DFS, mobile sports betting, and iGaming products.”

He further added, “We are also improving our efficiency in acquiring and retaining customers and have a strong pipeline of new jurisdictions to enter.”

Wall Street’s Take

Following the upbeat Q1 results, Morgan Stanley analyst Thomas Allen reiterated a Buy rating on the stock, with a price target of $31 (135.7% upside potential).

Based on expectations of legalization of US sports betting & iGaming across more states and higher per capita spending, Allen forecast US sports betting & iGaming to increase more than 14x to $21 billion in 2025 versus less than $1.5 billion in 2019.

He further stated, “Investors question LT profits, but other developed markets have shown 25-30%+ profits for operators at maturity, especially those with a customer acqusition advantage advantage similar to DKNG’s with its DFS database.”

The rest of the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on nine Buys and 10 Holds. The average DraftKings price target of $31.21 implies 137.34% upside potential to current levels.

Investors Weigh In

TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on DraftKings, with a whopping 75% of investors increasing their exposure to DKNG stock over the past 30 days.

Bottom Line

Notably, the company’s raised outlook does not account for contributions from the Golden Nugget Online Gaming acquisition as well as the company’s expected launch in Ontario in the second quarter of 2022.

Both, combined will boost the top line by another $130 million to $150 million. Though, it will negatively impact adjusted EBITDA by $50 million to negative $70 million.

The raised outlook, contributions from acquisitions, and new launches with robust customer demand bodes well for DraftKings’ growth trajectory longer term.

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