DraftKings stock (DKNG) hit a fresh 52-week high on Monday as investors grew more bullish on the mobile sports wagering company that saw shares decline nearly 60% in 2022.
For DraftKings, 2023 has brought a much-needed narrative shift as the operator has ticked away at industry leader FanDuel's market share in certain areas and has begun to win more frequently against its bettors.
It's brought bullishness on Wall Street too, where multiple analysts have recently raised their price targets noting the Street hadn't expected this strong of a first half of the year for DraftKings.
"The industry has been better than expected given single game parlays and reduction in promos, so I think that's good for the overall space, mainly DraftKings and FanDuel," Macquarie Securities managing director Chad Beynon told Yahoo Finance.
DraftKing surprised the Street to the upside during its first quarter earnings release in May, posting revenue of $769.65 million versus Street estimates for $705.18 million. Most notably, the company guided for a full-year adjusted EBITDA loss of $315 million in 2023, down from prior guidance for a loss of $400 million.
The path to profitability has been a central part of the investor story for DraftKings, which has yet to post positive quarterly EBITDA since its April 2020 initial public offering.
Wall Street analysts expect that to change next month, though. Consensus estimates compiled by Bloomberg currently project DraftKings to post $5.83 million in adjusted EBITDA for the second quarter when the company reports in early August. That's more than a 100% increase from its results for the same period last year.
"Analysts are realizing that Q2 expectations are too low for [DraftKings] and the industry, and then we're trying to figure out what that means for their commentary for 2023," Beynon said.
DraftKings shares have responded accordingly, skyrocketing more than 150% to start the year.
The 'power' of same game parlays
The increase of same game parlays and movement from a "sharp," or very engaged gambler, to a general audience are likely benefiting DraftKings, Beynon said.
Same game parlays are products where bettors combine the chances of multiple separate things happening within the same game into one bet. For instance, one could bet on the Kansas Chiefs to win the game, quarterback Patrick Mahomes to throw a touchdown, and tight end Travis Kelce to catch a touchdown. All three outcomes must happen for the bettor to win.
Such products offer higher margins than single bets.
"The bigger part of [the success] is the product and how fast they can come up with these menu options," Beynon said. "The companies that haven't done well like a Caesars or a Penn or a Bally's or to some extent Rush Street, I think their single-game parlay technology and [betting] odds and [betting] options just isn't what DraftKings has."
The odds are often long for such bets, indicating the house is more likely to win than the bettor. FanDuel pointed to parlays as a key reason it was leading the market in margins at its Capital Markets Day in November 2022.
In the company's most recent earnings call, DraftKings CFO Jason Park referenced more parlays and shrinking promotions as key contributors to improving gross margins.
When asked what's been most impactful for DraftKings over the last year at a media conference hosted by Needham & Co. in May, parlays were at the center of the discussion.
"The power of our increasing hold rate [the percentage of money bet the house keeps] cannot be underestimated," Park said. "Then, underneath that, same game parlays have been huge. Same game parlays, embedded within that player props, just again coming back to the theme of giving customers markets that they want to bet on."
Legalization as a tailwind
Since online sports betting was cleared for state-by-state legalization in 2018, multiple states have been added each year. It's been an important part of the growth story for companies like DraftKings as new markets have boosted revenues.
That trend looks like it's slowing down. California's propositions to legalize sports betting in the US flopped in November. While that might seem like a negative, slowing legalization might actually allow sportsbooks to stabilize their balance sheets. As marketing spend became a concern, new states have been seen as an "overhang," Beynon said.
"I think it's good," Jed Kelly, managing director of equity research at Oppenheimer, told Yahoo Finance after the California vote in November. "Like OK, we kind of got two years of visibility. So it could be where DraftKings could show its profitability...If you're able to get EBITDA breakeven in '24 and you get '25 with more states that are cash flow positive you probably are self-sufficient to go into California when it legalizes. Because even when it legalizes, it's not going to be right away."
And as Kelly pointed out in a note last Friday, which included a price target increase for DraftKings to $36 from $30, DraftKings is gaining market share in the states that have legalized sports betting.
DraftKings just overtook FanDuel in weekly betting handle (the total amount of money bet by customers) in New York for the first time and currently holds 50% of the gross gaming revenue in its home state of Massachusetts, which recently legalized sports betting in March.
"We view [DraftKings] overtaking [FanDuel] in New York handle share as a leading indicator that product quality is winning out," Kelly wrote.
Josh is a reporter for Yahoo Finance.