We start off with a valuation of DraftKings Inc. A company with a $16bn market cap at the close of 11/5/2020, with only $188 million in revenue in the past 6 months this is clearly a stock price for future growth. But what kind of future growth is expected?
What’s clear is that more states will legalize betting and more Americans will be exposed to sports betting and online gambling avenues and the market will grow overall. What is less clear, however, is how fast this market will grow. I approach this valuation by starting high level, focusing on the growth of online betting markets, and then following with DKNG’s market share of the future betting markets. I try to keep this analysis high level so we can plug and play growth figures for both the market and DKNG’s share of that future market because analyzing expense line items really is a waste of time here. This is a rapidly changing company in a disruptive industry and it’s stock price reflects expectations of the future of American online gambling and DraftKings’ ability to capture an increasing share of that growth.
If the online sports betting and gambling markets grow at an annual rate of 25% from 2020-2025, and DKNG is able to capture a 23% blended total market share of these markets, at a 30% EBITDA margin and 17.5x EBITDA multiplier (on the higher end but this is a growth company with no earnings yet), I get a valuation of around $28. Let’s look closer:
I start off by estimating the online sports betting and gambling market size below. I go off the estimated 2020 figure of around $3.14bn – $1.33bn from sports gambling, $1.5bn from iGaming, and $286mm from Daily Fantasy. Next I grow them by a CAGR of 10% to 45% and you see the results. For purposes of this valuation I designate a 25% CAGR as my Base Case. I don’t want you to stay fixated on the 25% CAGR but rather to see the effects of the rate on overall market size come 2025. We can argue all day about the numbers, but trying to estimate the growth of the market to the decimal for 5 years out is not an efficient exercise. This is still a nascent market experiencing a lot of disruption with no clear predecessor case studies.
Deutsche Bank is a noted Bear on this sort of Total Available Market (TAM) Share argument in the 20bn to 25bn range. They say, “To arrive at even a $20bn TAM, implied that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that … the adult spend grows by ~65% from this $51 level (referring to the per adult spend on sports betting in NJ from March 2019 thru Feb 2020). I look at the idea of full legalization and spend per adult in the table below.
To get to our $20bn TAM, indeed every US adult would need to be spending $84 a year on sports betting and online gambling. This ties out with DB’s 65% figure.
Next I estimate the DraftKings’ EBITDA based on the market size and their share of it. I use a healthy 30% EBITDA margin across all levels of market share and market size. As you can see, our Base Case is $672 mm in EBITDA for 2025. Not bad for a company expected to have over negative $400mm in EBITDA for 2020.
Finally, given the current stock price of $42.32, what is the implied EBITDA multiple for all these scenarios? Here’s a table summarizing that below:
So in order to justify this stock price for our Base Case, we have to be using a ~23x EBITDA multiple. That’s pretty high, however you can see the rest of the cases in the table ranging from over 120x to 5.88x multiples.
I layout some clearer Bear/Base/Bull Case scenarios at the bottom as well in more detail:
The valuation is clearly rich here, but it can be justified if one believes that 45% CAGR for the sports betting and online gambling industry and/or a greater than 23% market share for DKNG is possible. Perhaps also DKNG is able to squeeze more juice and scale efficiently/cut back on marketing and overhead/etc. and get their EBITDA margins over 30%. Let me know your thoughts and thanks for reading.
Here is the link to download the excel workbook, I try to keep it as simple as possible so anyone can plug and play their own ideas and see how it affects the valuation.
- Daniel J.