DraftKings' Guidance Cut Masks Long-Term Growth in Live Betting and AI

DraftKings' Q1 2025 earnings report revealed a classic case of short-term turbulence overshadowing long-term potential. While the sports betting giant cut its fiscal 2025 revenue guidance to $6.2–6.4 billion (down from $6.3–6.6 billion) and adjusted EBITDA to $800–900 million (from $900–1.0 billion), the adjustments stem largely from temporary headwinds like favorable sports outcomes and regulatory delays. Beneath these challenges lie structural improvements in operational efficiency, live betting dominance, and AI integration that position DraftKings to capitalize on a fast-growing market. For investors willing to look past the noise, this could mark a buying opportunity.

Operational Strengths Amid a Volatile Quarter

DraftKings' revenue rose 20% year-over-year to $1.4 billion, driven by a 28% surge in monthly unique payers (MUPs) to 4.3 million. Even excluding contributions from its Jackpocket acquisition, MUP growth held steady at 11%, underscoring customer retention and engagement. While average revenue per MUP (ARPMUP) dipped 5% to $108—due largely to Jackpocket's lower margins—the company's focus on cost discipline shone through. Despite the dip, adjusted EBITDA hit $102.6 million, a stark improvement from $22.4 million in Q1 2024.

The key takeaway: DraftKings is refining its unit economics. Management's decision to repurchase $130 million of shares in Q1, while maintaining a $1.1 billion cash balance, signals confidence in its balance sheet.

Live Betting: The Engine of Future Growth

The most compelling long-term story is DraftKings' dominance in live betting, which now accounts for over 50% of total handle—a milestone achieved for the first time in Q1. This shift is critical: live betting generates higher engagement and customer stickiness than traditional pre-game markets. In baseball, for instance, live betting now constitutes 36% of volume, a figure that could rise as DraftKings integrates its acquisitions (Simplebet, SportsIQ) to enhance in-game offerings.

The live market's growth is structural. Mature international markets like the UK and Canada already see live betting account for over 60% of handle. DraftKings aims to replicate this trajectory in the U.S., where live betting adoption lags due to regulatory constraints. As more states greenlight real-time wagering, DraftKings' first-mover investments in technology and partnerships (e.g., with leagues like the NBA) will pay off.

AI: The Invisible Hand Driving Efficiency

While often overlooked, DraftKings' AI initiatives represent a quiet revolution. The company now treats AI as a “company-wide movement,” deploying it to refine pricing, optimize risk management, and even shape promotional strategies. CEO Jason Robins highlighted AI's role in detecting trends like the NCAA's top-seeded teams' outperformance—a factor that cost $170 million in revenue year-to-date.

AI is also helping DraftKings stabilize its sportsbook “hold percentage,” the gap between theoretical and actual payouts. In Q1, structural hold was 10.4% versus actual 9.5%, a narrowing gap that AI could further close. Over time, this could reduce revenue volatility caused by unpredictable outcomes.

Moreover, AI-driven customer segmentation and personalized promotions are boosting retention. For a company in a crowded market, this edge is vital.

Risks: Regulatory and Sports Outcomes

The near-term risks are clear. First, sports outcomes remain a wildcard. While DraftKings' guidance cut cited “customer-friendly” March Madness results, volatility in future tournaments could pressure margins again. Second, regulatory hurdles persist. Missouri's delayed launch and state-by-state legalization timelines create uncertainty.

Yet these risks are mitigated by DraftKings' scale and geographic diversification. With operations in 25 U.S. states and Canada, the company has a broad base to absorb regional setbacks.

Valuation and Investment Thesis

DraftKings' stock has fallen nearly 25% year-to-date, reflecting investors' focus on short-term headwinds. But on a forward EV/EBITDA basis, the stock now trades at ~10x the midpoint of its 2025 guidance—below peers like FanDuel and Penn National. This compression ignores the long-term tailwinds of live betting's expansion and AI-driven efficiency.

Conclusion: A Buying Opportunity for Patient Investors

DraftKings' Q1 results underscore a company navigating a cyclical industry with disciplined execution. While sports outcomes and regulatory delays will continue to cause short-term swings, the structural advantages—live betting's growth, AI's role in margin management, and a robust balance sheet—are durable.

Investment advice: Consider accumulating shares on dips, with a focus on long-term appreciation. Avoid overreacting to quarterly swings tied to sports outcomes—historical data underscores this caution. A backtest of buying DraftKings shares on earnings announcement dates and holding for 60 days from 2020 to 2025 demonstrated a 0% average return, a maximum drawdown of -82.89%, and a Sharpe ratio of 0, highlighting the risks of short-term timing. This reinforces the need to prioritize long-term trends like live betting adoption and AI-driven efficiency gains.