On Thursday, DraftKings Inc. (NASDAQ: DKNG) reported better than expected 1Q 2023 financial results and boosted its full-year 2023 revenue and adjusted EBITDA guidance. More specifically, the company’s revenue reached US$770 million in the quarter, up 82% from US$422 million in 1Q 2022 and well ahead of the analysts’ consensus 1Q 2023 estimate of about US$705 million.
Similarly, 1Q 2023 adjusted EBITDA improved to negative US$222 million in 1Q 2023 from a loss of US$290 million in the year-ago period. Incidentally, DraftKings noted that unusually favorable outcomes – for the house, not for bettors – in March 2023 professional and college basketball games boosted 1Q 2023 adjusted EBITDA by about US$15 million.
These improved results prompted management to raise the midpoints of its 2023 revenue and adjusted EBITDA guidance to US$3.185 billion and a loss of US$315 million from the projections it issued three months ago of US$2.95 billion and negative US$400 million, respectively. These improving metrics underscore the two key aspects of DraftKings’ business plan: the legalization of digital sports betting is expanding quite rapidly in the U.S., as are customers’ appetites to use the company’s gambling platform.
DRAFTKINGS INC.
| (in thousands of U.S. dollars, except for shares outstanding) | Full Year 2023E | Twelve Months Ended March 31, 2023 | 1Q 2023 | 4Q 2022 | 3Q 2022 |
| Average Monthly Unique Payers (MUPs) | 2,800,000 | 2,600,000 | 1,600,000 | ||
| Average Revenue Per MUP, in US dollars | $92 | $109 | $100 | ||
| Revenue (A) | $3,185,000 | $2,592,908 | $769,652 | $855,133 | $501,938 |
| Sales and Marketing Expense | $1,386,265 | $521,740 | $345,282 | $321,714 | |
| as a % of Revenue | 53% | 68% | 40% | 64% | |
| Adjusted EBITDA (A) | ($315,000) | ($635,883) | ($221,611) | ($49,927) | ($246,211) |
| Adjusted EBITDA Margin | -10% | -25% | -29% | -6% | -49% |
| Operating Income | ($1,385,957) | ($389,785) | ($232,222) | ($455,028) | |
| Operating Cash Flow | ($654,764) | ($201,492) | ($148,458) | ($132,229) | |
| Cash – Period End | $1,087,668 | $1,309,172 | $1,382,651 | ||
| Debt (primarily Convertible) – Period End | $1,322,199 | $1,324,688 | $1,332,159 | ||
| Fully Diluted Shares Outstanding (Millions) | 479.7 | 468.3 | 466.6 |
Having said this, DraftKings still faces significant operating uncertainties. The company’s operating cash flow deficit over the twelve months ended March 31, 2023 is US$470 million, an enormous figure. If the company can reach its full-year 2023 adjusted EBITDA goal of negative US$315 million, that operating cash flow deficit will narrow over the course of the year. Note that DraftKings’ 2022 adjusted EBITDA was negative US$722 million.
The key element pressuring DraftKings’ cash flow is the need to incur promotional expenses to add and retain customers. Indeed, in 1Q 2023, the company’s sales and marketing expenses totaled US$522 million, equivalent to 68% of revenues. Positively, this expense as a proportion of revenue is starting to come down; in 1Q 2022, sales and marketing expenses amounted to 77% of sales.
Unlike many technology and fintech companies, DraftKings is working to bring down the amount of share-based compensation it pays to employees. Such stock-based payments, which essentially transfer value from shareholders to employees, are expected to decline to (a still-high) US$400 million in 2023 from nearly US$600 million in 2022.
DraftKings is a difficult stock to value. In terms of enterprise value (EV) to expected 2023 revenue, the stock trades at about 3.6x (US$11.6 billion of EV divided by US$3.185 billion of revenue), a reasonable multiple for a rapidly growing company. On the other hand, squaring DraftKings’ US$11.6 billion EV with a 2023E adjusted EBITDA loss of US$315 million requires an investor to be quite optimistic about the future.
DraftKings Inc. last traded at US$24.58 on the NASDAQ.
Information for this story was found via Edgar and the sources and companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
