HEDGEYE EDGE
It’s been an interesting ride for the “King” since its stellar Q3 print and Analyst Day in November. Results on DKNG’s last print spoke for themselves with an across the board beat and raise, which at the time assuaged some concerns about the promotional environment and margin trajectory. Following the Q3 print, DKNG delivered on its Analyst Day, which offered further clarity about the long-term backdrop and opportunity. But it wasn’t long before the negative narratives began to creep back into the story. ESPN Bet’s launch was met with a lot of attention, most of which being negative for the incumbents (DKNG and FanDuel), but the launch also lacked context. Layer on the softer hold % periods in November and early December, and some headline grabbing insider stock sales, and much of the positives from Q3 and ’23-TD were lost on investors. We get it, this is a “what you have done for me lately business” … But sure enough, as hold %’s drifted higher in December and market shares normalized post the initial competition wave, the narrative improved on DKNG, and appropriately so.
Looking ahead to the Q4 print and conference call, there’s still plenty to like about the company’s set-up and the stock. Is DKNG the same “table pounder” Long idea it was back in the high $20’s ahead of the Q3 print? No, not quite, but the stock is still on our Best Ideas list for a multitude of reasons. And yes, we understand the consternation post-Super Bowl (books lost to the public) and the optics around recent insider stock sales. We believe the offsets to the near-term negatives are plentiful and they start with our expectation of a healthy Q4 beat. Additionally, we believe the YTD results (ex. Super Bowl) are coming in well ahead of implied expectations (see early Jan releases from NY, MD, IN, IA). Looking further into ’24, we believe the combination of staggered new state launches layered on top of robust same-state OSB and iCasino growth should deliver results ahead of current guidance and consensus estimates. Beyond the NTM, the bull case of industry consolidation –> margin upside –> EBITDA growth –> FCF production is well intact. As a top 2 operator in the online gaming space, industry trends should further bolster DKNG’s company momentum. The stock remains a Best Idea Long at Hedgeye.
q4 preview | another beat on tap
What a difference a year can make for a company. For DKNG, ’21 and ’22 were periods marred by inconsistent performance, guidance, and overall investor messaging. As most know, ’23 was a lot different as DKNG began to reap the benefits of its product enhancements, its more balanced approach to investments, and overall industry momentum. The company is 4 for 4 in its last earnings prints with strong results, guidance, and steady investor messaging. Later this week, we think they’ll make it 5 for 5.
Looking to this Thursday night and Friday morning for the conference call, we think DKNG will capitalize on a great opportunity to beat a stale consensus and control the narrative around its stock heading into a pivotal year for the company and industry. By our count, revenues and market share finished nicely in Q4, with December OSB trends and total quarter iCasino trends offering the biggest swing factor in our model vs consensus.
For Q4’23, we expect a revenue beat of ~7% and an EBITDA beat of ~$25MM. The net effect of our estimates shows B2C revenues marginally decelerating in Q4 against a very difficult comparison from the year prior. Top line growth could decelerate a touch, but the streak of >50% growth is set to continue. Promotional rates were a factor in the Q and the blended promo rate should be higher YoY, but overall revenue production looks to be above Street expectations. Our higher revenues drive higher EBITDA, but we’re being conservative on flow through as investments in new and existing states could eat into some of the flow through.
In addition to our model build up, we’re also highlighting some recent slides on industry growth trends and market share. Web tracking analysis is more of an intra-quarter process for us, and we will look to update that data in the coming weeks as we get more January GGR data.
outlook | GUIDANCE SHOULD MOVE A TICK HIGHER
DKNG offered its initial crack at '24 guidance in November and while there’s been some volatility since then, the setup and case for numbers to move higher has only strengthened. It’s still early in the year but we suspect DKNG will be able to revise guidance based on having greater perspective of '23 and the expected cadence of new state launches, among other factors.
For full year ’24, we expect DKNG to raise both revenue and EBITDA guidance ranges. For revenue, the raise could be more modest and adding an extra $50-$100MM at the midpoint of the current $4,500-$4,800MM range. On EBITDA, we’re more optimistic on the competitive backdrop and the inflection of legacy states to profitability, and thus, believe the flow through rate could be higher on those incremental revenues. Ultimately, we believe DKNG could raise the EBITDA range from $350MM-$450MM to $400MM-$500MM vs current consensus of ~$440MM. Could they raise the bar even more? Probably, but we think they’ll hold back given how early it is in the new year.
PARTING THOUGHTS – DKNG REMAINS A TOP PICK IN GAMING
Given the performance of the stock(s) and the estimate revision trends – both of which being up and to the right – there’s decidedly less debate about whether the online gaming industry will get to scale and generate real profits and FCF. That said, there are still doubters out there and consensus estimates are still too low. Building off that theme, we get the sense that there’s not nearly enough appreciation for the resilient total market share trends for both DKNG and FanDuel. Nor is there enough appreciation for the broader rate of industry GGR growth. As more January and Q1 data is reported from large “core” states, we suspect that will change.
DKNG’s stock has done well but is coming off a depressed base from the prior year and remains materially below valuation levels experienced when the EBITDA outlook was much weaker than current. Furthermore, EBITDA is not the only item inflecting in the new year… free cash flow should as well, and in a big way. With numbers moving higher and the company ready to print real FCF, we see support for a higher stock price.
