DraftKings ensured last Friday would be a day to remember. Within the space of a few hours, it announced that it would acquire lottery app Jackpocket for $750m (€696.7m/£596.0m) and released its fourth quarter and full-year 2023 results.
Let’s start with Jackpocket. While DraftKings stands to benefit heftily from the deal – $340m in additional revenue per year, to be exact – the $750m price tag bamboozled even the most seasoned industry experts.
For Birkin, the acquisition certainly adds another string to DraftKings’ bow.
“On the face of it, I think it could be viewed as a positive acquisition, providing diversification, scope for significant market growth and another customer acquisition channel,” he says.
But with the price tag and market scope aside, there’s also the basic question of how lottery products are currently faring in the US. Birkin believes that the lack of ilottery progress in the US could foster an even more competitive market for companies.
“iLottery has been painfully slow in the US in terms of states legalising it – and at some point this has to change – which means that lottery couriers will potentially be competing against official state lottery online channels,” he explains.
“This can be done successfully – as Jackpocket has shown in New Jersey – but it’s a significant potential competitor in each market, and that’s a best-case scenario of a state launching their own iLottery.”
Never without risk
The risks are few, but hold serious weight. The worse-case scenario is that state lotteries ban couriers, in an attempt to protect their own online sales channels.
“While this may be viewed as highly unlikely by DraftKings, it’s not without precedent – as Ventura24 found out in Spain,” Birkin warns.
Jackpocket aside, DraftKings’ FY24 earnings report offered a lot to delve into. Birkin describes the overall result as “decent”, pointing out the operator’s net win share as a highlight.
“Their increase in sports net win share is particularly impressive, and is something that we track in our market share tracker,” he explains. “Net win is the key data point, and we’ve always been sceptical of operators who focus on their share of handle, which is largely a meaningless metric that can be boosted by promotional activity.”
Boosting net share, he continues, “is the key to long-term sustainability and profitability” – adding that this is “the opposite of what we’re currently seeing with ESPN Bet”.
Last week, Penn Entertainment reported a net loss of $358.8m in the fourth quarter – the same quarter wherein it launched ESPN Bet across 17 states.
Revenue break down
Another notable element of DraftKings’ Q4 results was its $43.8m loss. Compared to Q4 2022 – which saw a loss of $232.2m – this was a significant improvement.
“I think they’re demonstrating that they are on the path to profitability,” Birkin muses on the operating loss, “and that’s when results went against them.”
“Although we take this with a pinch of salt as operators don’t note the impact of customer recycling, leading to higher wagering when talking about negative results.”
In fact, Birkin is encouraged by all elements of the operational costs – even those that grew during the quarter. Costs at DraftKings’ product and technology segment increased 5.7% to $88.1m, and general and administrative costs climbed 3.3%
“It’s encouraging to see the top line growth while marketing costs are falling, and while product and technology costs are increasing, we view this as a positive thing, he continues. “If anything, I wouldn’t be upset to see higher costs here, as brand can only take you so far, and improving product is what drives long-term growth.”
Return to profitability
Crucially, DraftKings must return to profitability. But when? There’s no roadmap for this, but according to Birkin, the outlook is bright.
“There will always be caveats to this, and profitability is measured in different ways – normally to suit whoever is claiming it – but the trajectory is a positive one.”
So what could DraftKings do to keep this journey to profitability moving along? Birkin believes the answer lies in online gaming growth.
“I think they’ll get there just keeping on the same track – however I believe that igaming growth is the key to accelerating this,” he continues.
“A 3 percentage point increase year-on-year is a positive step – especially as FanDuel has really pushed their igaming positioning over this period – but with the GNOG acquisition and DraftKings’ positioning in online sportsbook, I think investors should be hoping for continued improvement in igaming share.”
Original article: https://igamingbusiness.com/strategy/ma/jackpocket-draftkings-750m-bet/
