DraftKings (DKNG) just released its Q3 financials. While the top line of the digital sports entertainment and gaming company came in slightly below Wall Street analysts’ forecast, its bottom line results were better-than-expected. However, DKNG stock took a hit in pre-market trading as investors reacted to the 2024 guidance cut.
Why Did DraftKings Lower Its 2024 Guidance?
DraftKings revised its fiscal year 2024 revenue and adjusted EBITDA forecasts downward, citing the impact of customer-friendly sports outcomes early in Q4. Favorable outcomes for bettors, particularly in the NFL, created a $250 million and $175 million headwind for its revenue and adjusted EBITDA guidance, respectively.
The company now anticipates revenue of $4.85 billion to $4.95 billion (previously $5.05 billion to $5.25 billion), and adjusted EBITDA of $240 million to $280 million (down from $340 million to $420 million).
Despite this, DraftKings is making efforts to offset the pressure on adjusted EBITDA. The company has optimized its promotional spending and focuses on high-value customers. Promotional optimization and expense efficiency initiatives will contribute about $55 million to its fiscal 2024 adjusted EBITDA.
With this context, let’s explore whether DraftKings still remains an attractive investment opportunity after the 2024 guidance cut.
Resilient Core Business Performance
Despite the downward revision in its 2024 guidance, DraftKings' core operations exhibit robust growth and efficiency. In the third quarter, the company expanded its Sportsbook and iGaming customer base, while simultaneously lowering customer acquisition costs (CAC). Below are the key highlights from its recent performance:
- Strong Customer Metrics: DraftKings demonstrated strength in customer acquisition, retention, and engagement. The online sportsbook handle and gross gaming revenue grew by 25% and 39% year-over-year, respectively. Additionally, iGaming gross gaming revenue increased by 26% compared to the third quarter of 2023. Newly acquired sportsbook and iGaming customers rose by 14% year-over-year, with CAC for these customers improving by nearly 20%.
- Improved Structural Hold and Parlay Offerings: The sportsbook’s structural hold—essentially the share of total bets retained as revenue after payouts—has shown notable year-over-year growth. This uptick is largely fueled by rising customer interest in parlay bets. Notably, the NFL parlay handle mix is outperforming last year’s 2023-2024 season by over 500 basis points. Additionally, favorable sports outcomes during Q3 aligned with the company’s projections, further boosting revenue performance.
- Optimized Promotional Spend: Promotional reinvestment for the online sportsbook and iGaming sectors improved by 300 basis points year-over-year in Q3, measured as a percentage of gross gaming revenue. This significant gain was driven by two key strategies: reducing promotions targeted at lower-value customer segments and implementing measures to offset the impact of the Illinois tax increase.
- Expanding Micro and Live Betting Opportunities: Recognizing the growing potential of micro-betting and live betting, DraftKings has invested heavily in improving these features. This has been achieved through a combination of internal development and strategic acquisitions, further strengthening its position in a competitive market.
- Product Innovation and Market Differentiation: The company continues to differentiate its Sportsbook product. DraftKings recently introduced exclusive NBA markets designed to enhance customer engagement with key game storylines. Its in-house Same Game Parlay offering expanded to over 50 new NBA markets. The mobile sportsbook app secured the top spot in an industry report, ranking first in User Experience, Betting Interface, and Features categories. This complements the company's highly ranked DraftKings Casino and Golden Nugget app.
A Promising 2025 Outlook
DraftKings maintains a positive outlook for fiscal 2025. The company is projecting fiscal year 2025 revenue between $6.2 billion and $6.6 billion, a year-over-year growth of 27% to 35% based on updated 2024 guidance.
Further, its adjusted EBITDA is expected to be between $900 million and $1 billion for fiscal 2025, driven by revenue growth, improved gross margins, and controlled operating expenses.
Analyst Sentiment
Wall Street remains bullish on DKNG stock, with a consensus “Strong Buy” rating. Analysts' optimism stems from the company’s ability to navigate near-term challenges while capitalizing on its strong customer acquisition and engagement strategies.
Conclusion: Is DraftKings Stock a Buy?
While the guidance cut raises concerns, DraftKings' underlying growth metrics and operational efficiency remain solid. The company's strategic initiatives to optimize promotions and reduce costs, coupled with robust product innovation, position it well for long-term growth.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
