DraftKings stock tumbled more than 20 percent Friday (February 18) despite the company meeting its revenue projections, a potential sign of investor impatience with the company’s high customer acquisition spending.
The company reported a $473m increase in revenue for the fourth quarter of 2021, but resulting in a $128m EBITDA loss, the result of $263m in sales and marketing spend in the quarter.
In total, the company reported a $676m loss for the entirety of 2021, and projects that the company will lose between $825m and $925m in adjusted EBITDA this year, including a $320m to $340m loss in the first quarter resulting from launches in New York and Louisiana.
“Our business model is based on acquiring customers with two- to three-year gross profit paybacks, states turning positive contribution profit after two to three years and then positive contribution profit states offsetting negative contribution profit states,” CFO Jason Park said Friday.
“In 2022, the states we launched in 2018, 2019, and 2020 will generate significant positive contribution profit,” Park said.
CEO Jason Robins said the heavy losses were the result of the aggressive launch strategy the company has pursued in new states and that the company expects to be profitable by the fourth quarter of 2023.
“We would expect, if we had frozen state launches at the end of last year, we'd be profitable by this year fourth quarter,” Robins said.
Robins said DraftKings will continue to run its new state launch playbook going forward as it has to date.
“Our assumption is that we continue to run very similar new customer promos to what we've run in the past, and that we run similar retention-based promotions around key moments like the start of NFL season, so nothing's really changed there.”
“And I think as we've noted in the past, as states mature, just based on the fact that a higher percentage of promotion is spent on new customers than repeat, you should expect to see natural decline,” Robins continued.
“And then, of course, the mix of new versus mature or more mature, I should say, states will affect the overall.”
Robins also touched on the failed Florida ballot initiative during the call. DraftKings and FanDuel were among the funders for “Florida Education Champions,” the group that led the proposed online sports-betting initiative in the state.
Robins cited several factors that contributed to their failed effort, including the coronavirus and the compressed time frame given when signature gathering started.
“We are very encouraged, however, by the over 1m individuals who signed petitions in less than eight months, which shows that Floridians do want the opportunity to vote on a competitive mobile sports-betting market in the state,” Robins said.
The earliest another initiative could qualify for the ballot is 2024.
“We are exploring all options to ensure that Floridians get that opportunity as soon as possible,” he said. “And if we were to refile, we are very confident that, given the extended time frame, we will be able to qualify for the 2024 ballot.”
On Friday, DraftKings shares lost $4.77, or 21.62 percent, to close at $17.29 on the Nasdaq market. The shares lost another 8 cents, of 0.46 percent, to $17.21 in after hours trading.
Barry Jonas, an analyst with Truist Securities, noted that fourth-quarter revenue beat estimates by 6 percent with an EBITDA loss of 15 percent to 19 percent ahead of expectations. He said 2022 EBITDA guidance was worse than expected, while a revenue guidance raise of 7 percent mostly reflected new states coming online.
“Shares are down meaningfully on profitability concerns, though DraftKings thing fourth quarter 2023 will be profitable and aren’t planning any capital raises, which had been a bey investor concern,” Jonas wrote in a research report.
Shares of DraftKings are down 35 percent year-to-date.
“We do expect marketing [costs] to come down over time, although we recognize that the pathway appears longer than initially expected give the level of competition and rapid pace of new state rollouts,” Chad Beynon, an analyst with Macquarie Research, said in a research note.
In this environment, Beynon said they continue to believe there will be a handful of winners, those with scale, differentiated user acquisition strategy, brand, and technology.
“We firmly believe DraftKings falls into this category,” he said. “With $2.2bn of cash, we believe DraftKings has the runway to bridge the gap to the two- to three-year timeline for state-level profitability.”
With shares 76 percent of their 52-week high of $74.38, Beynon said the “story and expectations have meaningfully de-risked.”
Robins told CNBC’s “Squawk on the Street” following its earnings release that DraftKings performed consistently.
“I think the model’s working and we’ll play the long game here,” Robins said. “I’m very confident once the market settles down and rationality kicks back in that the metrics, we’re putting out will start to resonate, but in the meantime, we’ve just got to keep doing our thing and hopefully the market will catch on at some point.”
“I can’t predict what the market is going to do, it’s a wild market right now,” Robins added.