DraftKings Earnings Could Be Ugly, Says Analyst

Posted on: November 4, 2021, 12:05h. 

Last updated on: November 4, 2021, 01:07h.

DraftKings (NASDAQ:DKNG) steps into the third-quarter earnings confessional Friday before the open of US markets. At least one analyst says investors should gird for a less-than-stellar update from the online sportsbook operator.

DraftKings Earnings
DraftKings, shown here in happier times, reports Q3 earnings tomorrow. One analyst says the report could be ugly. (Image: Twitter)

In a note to clients earlier this week, Roth Capital analyst Edward Engel says Wall Street is forecasting DraftKings’ net gaming revenue (NGR) will decline 15 percent for the September quarter. But “both competitor and industry data are trending well below.”

The analyst points to Flutter Entertainment’s (OTC:PDYPY) third-quarter update, out earlier this week, as a potential warning sign for DraftKings investors. Flutter said July quarter NGR slumped 24 percent amid market share losses in iGaming and sports wagering. That company is the parent of FanDuel, one of DraftKings’ primary rivals.

DraftKings missed analysts’ earnings per share (EPS) estimates in each of the past four quarters. But the operator did beat revenue forecasts in five of the past six quarters. For the recently completed quarter, analysts expect DraftKings lost $1.06 a share on sales of $237.9 million. The company isn’t profitable as of yet.

DraftKings Primed for Earnings Miss

Engel says that based on the premise DraftKings likely lost market share in the third quarter, its NGR probably declined. That could prompt a miss of analysts’ revenue forecasts. Compounding those woes is the fact that Wall Street forecasts for the company’s fourth-quarter top line might be too optimistic.

The Street’s 4Q forecasts also appear ambitious, which imply NGR +87 percent quarter-over-quarter,” said the analyst. “After a 3Q revenue miss, we see the Street lowering 4Q forecasts. With 4Q contributing (approximately) 34 percent of full-year revenues, we see this leading to a reduction in 2022 forecasts as well.”

Engel initiated coverage of the online sportsbook operator earlier this month with a “sell” rating and a $41 price target. He’s the only analyst with a bearish rating on the shares.

Boston-based DraftKings recently walked away from an attempted takeover of Entain Plc (OTC:GMVHY). While that saves the former suitor more than $22 billion in cash and stock, Engel noted after the talks were over that DraftKings making an offer in the first place raised plenty of questions and concerns.

All About Market Share

The Roth Capital analyst isn’t bearish on sports betting in a broader sense. Actually, it’s the opposite, as he has “buy” ratings on Penn National Gaming (NASDAQ:PENN) and Rush Street Interactive (NYSE:RSI).

However, he notes the current market share dominance enjoyed by FanDuel, BetMGM, and DraftKings isn’t permanent, and DraftKings’ benefits from leveraging daily fantasy sports (DFS) to turn those clients into sports bettors are waning.

“While we’re bullish on US online gaming, we don’t believe 70% market share for the three leaders (Fanduel, BetMGM, DraftKings) is sustainable, and see DraftKings conceding market share as mid-tier operators ramp customer acquisition and better cross-sell legacy casino customers,” concludes Engel. “While DraftKings’ Daily Fantasy Sports (DFS) products offer early market share advantages, we see benefits fading as markets mature.”