DraftKings Pares Ad Spending, But Will It Last?

Posted on: August 10, 2022, 01:55h. 

Last updated on: August 10, 2022, 02:23h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings (NASDAQ:DKNG) stock is higher by 16.40% over the past week — a surge fueled largely by the company lifting its 2022 revenue outlook while cutting its full-year earnings before interest, taxes, depreciation and amortization (EBITDA) estimate.

Perhaps to the delight of some investors, the gaming firm also dramatically curbed marketing spending in the April through June period.

DraftKings ad spending
Actor Martin Lawrence in a DraftKings commercial. The company pared ad spending in the second quarter. (Image: YouTube)

Advertising expenditures coupled with promotional spending to lure new clients are among the primary drags on online sportsbook operators’ profitability. Still, over the past couple of years, operators displayed a willingness to engage in this arms race, forsaking profits in the name of growth. That appears to be changing. At least for now.

Sportsbooks have spent hundreds of millions on advertising in the last year as sports gambling has been legalized in more states, but major competitors like DraftKings and Caesars Entertainment dramatically reduced ad spending in the second quarter,” according to eMarketet.

In the June quarter, DraftKings’ ad spending rose 16% to $197.5 million. But that’s well below the 270% increase notched in the same period a year earlier.

DraftKings Ad Cuts a Start, Maybe not Permanent

Underscoring investors’ disdain for profligate spending and a lengthy road to profitability, DraftKings stock needs to more than triple from current levels to reclaim its 52-week high. That’s even with the shares surging 56.52% over the past month.

While the second-quarter ad cuts are a starting point, critics are apt to say that’s an ideal period for sportsbook operators to pull back on marketing spending. College basketball ends early in the quarter, and the NBA season is over before the conclusion of June.

Analysts acknowledge DraftKings and rival operators might not be able to hold back on marketing costs for too long. That’s because college football kicks off later this month, and the 2022 NFL campaign starts in September. With football being the most wagered-on sport in the US, gaming companies will be unlikely to disappear from the advertising scene in the months ahead.

There could be added impetus for sportsbook operators to spend in the second half, because the World Cup runs from Nov. 21 through Dec. 18. Typically, the once-every-four-years tournament takes place in the second quarter. But owing to FIFA’s controversial decision to award the event to Qatar, it’s occurring later in the year because of that country’s high summer temperatures.

Other Important Second Half Factors

While gaming companies are reining advertising and promotional expenditures, that doesn’t mean spending of all forms is dramatically curbed.

Some of that ad money is being diverted into politics; a California ballot initiative supported by sportsbooks like FanDuel and DraftKings that would legalize online betting was certified for the ballot in July,” eMarketer added.

Massachusetts and Ohio are also expected to launch mobile sports betting early next year. Maryland could join that fray, too. The addition of those markets could stoke renewed ad spending, not to mention the possibility of large amounts of capital directed to California if voters there approve online sports wagering.