How DraftKings will handle risks, costs amid expansion plans

DraftKings (DKNG) released its fourth-quarter earnings results, revealing a rise in its quarterly revenue by 44% year-over-year. In addition, the company announced a $750 million deal to buy lottery app Jackpot while continuing to expand sports betting operations into new states.

Macquarie Group Senior Analyst Chad Beynon joins Yahoo Finance to discuss DraftKings' performance and expected operations costs for 2024.

"Sales and marketing for 2023 was roughly flat. It was up 3% for the year, right And they actually got into some of the new markets that you talked about. For 2024, despite getting into new markets like North Carolina and Puerto Rico, sales and marketing spend will actually come down," Beynon explains. "And the reason is the older cohort states will just see less advertising, so if you're in a state like New Jersey, who's been legal for some time, sorry to say that you'll probably see fewer ads on some of the sports channels. That's a big driver of profits for Draftkings, and that's kind of where this scale is finally... taking over where sales and marketing, SG&A, are roughly going to be flat for the next couple years."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

DraftKings is rebounding today after its fourth quarter results missed estimates despite posting a 44% jump in revenue from a year ago. The sports betting company also expanded its Sportsbook to Maine and Vermont and announced it will acquire lottery app jackpot for about $750 million. So for more on the quarter, we are joined by Chad Beynon, McGuire Group senior analyst. Chad, thank you so much for being here. Talk to me about your headline reaction to this print. What's sticking out to you the most for DraftKings?

CHAD BEYNON: Sure. Thanks for having me. Yeah. The controllables came in better than expected. So in the fourth quarter, there were some customer friendly outcomes. So what that means is, the public actually did OK against the sportsbooks. That generally reverses in other months. But in November, particularly during the football season, customers did very well. So it was a slight miss. However, if you adjust for that, it was a massive beat for the fourth quarter.

And then more importantly for 2024, DraftKings increase their revenue guidance, increased their profit guidance. This is a company that's expected to grow 20% to 30% this year. And then they actually put out guidance into '26 and '28, and they believe they can continue to grow mid to high teens which is very favorable from our investors standpoint.

- And Chad, we remember when there were all these promotions and we were wondering how that was going to bite into the bottom line. What phase is DraftKings in now? Where does the growth story go from here?

CHAD BEYNON: That's probably the most important point here. Sales and marketing for 2023 was roughly flat. It was up 3% for the year. And they actually got into some of the new markets that you talked about. For 2024, despite getting into new markets like North Carolina and Puerto Rico, sales and marketing spend will actually come down. And the reason is, the older cohort states will just see less advertising.

So if you're in a state like New Jersey who's been legal for some time, sorry to say that you'll probably see fewer ads on some of the sports channels. That's a big driver of profits for DraftKings and that's where this scale is finally taking over. Where sales and marketing, SG&A, are roughly going to be flat for the next couple of years. Obviously if you saw a California, a Florida, a Texas legalized, maybe you see a little bit of an improvement.

But this is really the point of the cycle where you want to own companies like this. And it's a $20 billion market cap company and it's a leader with FanDuel at this place.

- So I'm curious then Chad. When you think about risks for the name, you talk about legislation. I think about cybersecurity. And the reports that we've been hearing about increased cyber threats to folks who are utilizing these sports betting apps. To what extent is that a factor in your consideration of potential downside for this name moving forward?

CHAD BEYNON: Fair point. On the land based side, the third quarter was certainly a disappointing situation out in Las Vegas when Caesars Entertainment and MGM Resorts were both victims of cyber security. And there were others within the Casino space as well. Obviously in the digital world, there are arguably more risks. So for companies like DraftKings, that is a risk. They've built this team to be bulletproof in many ways.

They really scaled up almost too aggressively in the early years. And that's why the stock had suffered during that time period. But in '23, they held headcount or maybe even reduced headcount, that helped the stock increase 200%. But I think a lot of the things that they've put into place in terms of really protecting customer data puts them in a good position. It also creates a moat versus some of the smaller companies that are trying to grow.

We're just learning how expensive it is to make sure that you're protecting your customer data and then also drive revenue as well.