DraftKings rallies despite missing expectations, lowering FY24 guidance

DraftKings (DKNG) reported mixed Q3 results, missing on revenue and EPS compared to expectations but posting strong growth in user engagement metrics. Revenue rose 39% year-over-year to $1.1 billion, slightly below analyst estimates of $1.11 billion, while the company reported a loss of $0.60 per share, missing the anticipated $0.40 loss. Notably, Monthly Unique Payers (MUPs) grew by 57% to reach 3.6 million, beating projections of 3.33 million. However, the average revenue per MUP decreased by about 10% year-over-year to $103, falling just short of expectations.

Guidance for FY24 was revised downward, with DKNG now expecting revenue between $4.85 billion and $4.95 billion, lower than the prior range of $5.05 billion to $5.25 billion. Adjusted EBITDA guidance was also reduced to $240-280 million from the initial $340-420 million. The company attributed this reduction to "customer-friendly" sports outcomes early in Q4, where an unusual number of favorites won, impacting margins. Despite this, DKNG introduced an encouraging FY25 revenue outlook of $6.2 billion to $6.6 billion, representing strong anticipated growth.

Analysts are noting that, while the lowered guidance may concern some, the strong user growth and engagement reflect positively on DraftKings' market position. BMO raised its price target for DKNG, citing the robust year-over-year growth in player acquisition, which grew by 14%, and improved customer acquisition costs. CEO Jason Robins highlighted the firm’s strong fundamentals, pointing to improved gross margins and scaling efficiencies, which are expected to contribute to a positive outlook for 2025.

The company’s performance in unique payers and average revenue per user suggest that DKNG is attracting a wider audience but potentially generating slightly less revenue per user, a trend that may improve as newer customers become more engaged. To further its growth, DraftKings secured a $500 million revolving credit facility, which will support working capital and expansion initiatives. This capital bolsters the company’s balance sheet, providing a buffer against market fluctuations and potential funding for future growth.

Investor reaction was notably positive, with DKNG shares rallying by around 5.5% despite the mixed results and revised guidance, likely fueled by optimism over the favorable FY25 outlook. Analysts, such as those at CFRA Research, upgraded the stock to a strong buy, attributing this to DraftKings' innovation in product offerings and the company’s overall strong performance relative to competitors. The company’s expanding user base and recent legislative wins in states like Missouri and Virginia, which passed gambling initiatives, are also seen as promising catalysts for future growth.

In light of regulatory advancements, analysts expect DraftKings to capitalize on new market entries and expansions, which could further drive its revenue and user growth. Management remains confident about navigating near-term challenges, as Robins noted that the unpredictability of sports outcomes is part of the business and can sometimes turn in DraftKings' favor.

In conclusion, while DraftKings’ Q3 earnings report revealed some pressures on revenue and profitability, the company’s solid fundamentals, user growth, and promising FY25 outlook make it an attractive option for investors willing to weather short-term volatility. The positive market reaction and recent analyst upgrades reflect a consensus that DraftKings remains a strong player in the sports betting market.