Savvy investors can often identify the significant factors moving a company’s stock price and know to focus their research time on those items instead of spreading their efforts out and trying to cover everything.
For DraftKings ( DKNG -4.46% ), these factors likely include its online gambling business model, management’s aggressive investments in growth, and initial outperformance that has it raising long-run expectations. Let’s look at each in more detail below.
1. DraftKings is an online gambling company
First and foremost, smart investors understand that DraftKings is an online gambling company. That has a few implications, not the least of which is that DraftKings must gain approval from each state in the U.S. to operate in the jurisdiction.
It’s making steady progress in this regard. DraftKings is live with mobile sports betting in 17 states that collectively represent 36% of the U.S. population. iGaming is not as far along, and it is live in five states, representing roughly 11% of the U.S. population.
Another important implication of a gambling company is that it may turn off a group of investors who are morally against the activity. This could potentially limit shareholder returns.
2. Aggressive investments in growth
Given that DraftKings is in growth mode, it is investing accordingly. Each time it gains approval to go live in a new state, it blitzes the population with advertising and promotional offers to encourage sign-ups. Another aim of the aggressive campaign is to attract and retain customers before competitors can reach them.
In the three months ended Dec. 31, DraftKings spent $278 million on sales and marketing. That was up from $192 million during the same time in the previous year. Similarly, in the year ended Dec. 31, DraftKings invested $982 million in sales and marketing, up from $495 million in the year prior.
The investments have led to massive losses on the bottom line, but management feels it is worthwhile and continues the strategy with each new state launch. Investors can expect this trend to continue so long as DraftKings is in growth mode.
3. Raising the bar
Early results from the markets that DraftKings is currently operating in are better than expected. Accordingly, DraftKings is raising long-run expectations for revenue and profits. Management now thinks that the total addressable market for online sportsbooks and iGaming in North America is worth $80 billion. That’s $13 billion higher than the previous estimate of $67 billion.
The larger market size gave management confidence to raise the long-term profit outlook. DraftKings estimates it can deliver adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.1 billion annually. This is up by $400 million from the previous outlook for $1.7 billion. Keep in mind these are estimates, and it is not certain the company will be able to achieve these targets.
If you are interested in learning more about DraftKings stock, the three factors mentioned above are an excellent place to start.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.