Draftkings Inc (NASDAQ:DKNG) is set to benefit as more US states legalize gambling and its existing customer base spends more.
While these are compelling dynamics, analysts at UBS are more excited by the natural reduction in promotional activity the company will have to fork out for as states mature five years after the US Supreme Court ruled in favor of sports betting in 2018.
This will lead to a very high flow-through of gross gaming revenue (GGR) as the promotional gap between GGR and net gaming revenue (NGR) narrows, the analysts wrote in a client note on Thursday.
“DKNG believes that over time, they can get the promotional spend to be in the 20% range, in mature states. And that reduced promotional activity all falls to the bottom line because revenue is taxed at the GGR level,” the analysts wrote.
“As states mature, the level of promo spending needed will naturally come down, since retaining customers costs less than acquiring them.”
UBS also sees opportunity in DraftKing’s ability to increase its share of the gaming market by improving its hold rate.
The company’s online sports betting (OSB) hold reached roughly 10% in its fiscal 2023 second quarter — or about 9% adjusted for favorable sport outcomes — an improvement on the 7% recorded a year earlier and catching up with rival FanDuel, which has an OSB hold of 10%, moving towards 12%.
“We believe DKNG can reach FanDuel's level. DKNG believes that it can also grow hold by adding more legs to parlay offerings (at 5 now, going to 6), more cash-out options and live mix, for example,” the analysts added.
When PENN Entertainment launches ESPN Bet in November the analysts noted that DraftKings doesn’t plan to match their promotions, instead relying on its mid-to-high 80% retention rate.
“The first mover advantage can be seen in PA, where DKNG opened two months later than FanDuel in 2019 and still lags share,” the analysts added.
“But that stickiness will help them going forward. Even if a new competitor gains share, it can continue to come from smaller sportsbooks.”
UBS has maintained its ‘Buy’ rating on DraftKings with a $39 price target.
The company’s shares were up 0.9% at $31.18 by midday in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com