DraftKings (DKNG -1.49%) has been a great stock to own over the past year, with the stock up over 55% during that period. However, it's not hard to imagine that the best days are still ahead for the company and its shareholders.
The stock has always been a play on states' continued legalization of online sports and casino betting. This has steadily played out, with Vermont and North Carolina the latest to legalize sports betting.
However, three of the largest states remain in play -- California, Texas, and Florida have not fully legalized online sports betting. Florida has legalized online sports betting solely for the Seminole Tribe, although that action is being challenged in court. Texas, meanwhile, nearly passed online sports betting previously, and there is chance the state could legalize it when its legislature next meets in 2025.
DraftKings provided some long-term guidance at its last Investor Day, which took place last November. The company forecast that it would generate $6.2 billion in revenue in 2026 and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.3 billion. It projected that this would increase to $7.1 billion in revenue and $2.1 billion in adjusted EBITDA in 2028. These projections only include states where online sports betting is already legal, and does not take into consideration if a state like Texas were to legalize online sports gambling.
DraftKings has acquired lottery app Jackpocket since those forecasts. The company has projected that the acquisition would add between $260 million and $340 million in revenue and $60 million to $100 million in adjusted EBITDA in 2026.
This gives a good base to project what DraftKings' financial metrics might look like in five years.
Becoming more efficient
There are reasons to believe that DraftKings' outer-year projections are conservative.
The DraftKings story now is less about getting into new states and more about becoming more profitable in each state it has entered. Once DraftKings enters a new state, it spends a lot of money on marketing and promotions to gain new customers. This eats into initial profitability.
However, as its markets mature, marketing and promotion spending spending starts to decline. Newer states are also beginning to mature more quickly, as the DraftKings brand has become pretty widely known in the U.S.
DraftKings' improving marketing efficiency could be seen in its first-quarter results. While revenue rose 53% to $1.175 billion, its sales and marketing expenses fell 12% to $340.7 million. As a percentage of revenue, sales and marketing dropped to 29% of revenue versus 51% a year ago.
Fewer promotions also helped its gross margin, which improved to 39.6% from 32.2% a year ago. The company also noted that it has achieved a gross margin of 55% or more in 12 of its states in 2023.
Why is this all important to investors? Because the higher DraftKings' gross margin is, and the less it needs to spend on marketing, the more profitable it will become. And ultimately, profitability should drive the stock higher in the coming years.
Image source: Getty Images.
Where the stock could trade in 2029
If DraftKings' revenue growth slowed to 16% a year, it would achieve around $10 billion in revenue in 2029. If by then it can achieve a 55% gross margin, as it has in 12 states, its gross profits would be about $5.5 billion. Noncash expenses, such as depreciation and stock compensation, are currently around $1.8 billion when annualizing the first-quarter numbers. If these expenses were kept in check and rise to $2 billion by 2029, DraftKings would be able to deliver adjusted EBITDA of about $3.5 billion in 2029.
Using that projection of $3.5 million in EBITDA and a 16% a year revenue growth rate, a 20 to 25 times enterprise value (EV)-to-EBITDA multiple would be appropriate for the stock. Currently, the company's debt and cash balance themselves out pretty closely, so the company's enterprise value and market cap are pretty similar. DraftKings currently has about 869 million shares outstanding, and based on its stock compensation I see that going up to about 970 shares in 2029.
Taken altogether that would put DraftKings stock at between $70 to $90 in 2029, which would be a solid return from today's level.
A lot can happen between now and 2029, and there are other potential catalysts the stock could see, such as Texas and/or one of the other big states legalizing online sports betting. Meanwhile, its newly acquired lottery app, Jackpocket, is only in 16 states plus Puerto Rico and Washington D.C., while online casino gaming is legal in just seven states. So there is an opportunity for the company to grow revenue at an even faster clip.
At the end of the day, though, DraftKings looks poised to trade at a much higher price in five years than it does today. As such, the stock looks like a solid buy.
