3 things to know about DraftKings stock before you buy

DraftKings (DKNG 3.22%) has been a strong performer over the past five years, with the stock up more than 250% over that period. However, the stock’s momentum has stalled in 2024, with the stock slightly down year-to-date.

However, the online sportsbook operator continues to have a bright future ahead of it. Let’s look at three things investors should know about the company before buying shares.

How DraftKings Makes Money

In simpler terms, DraftKings’ revenue comes from bringing in more money from placed bets than it pays out in winnings. This is called a “hold” in the gambling industry.

The company’s biggest source of income comes from online sports betting and running a sportsbook. In order to make money from online betting, a portion of the bets it brings (commonly known as “vig”) is required. It then appears to get as close as possible to an equal amount of bets on both sides of a bet in order not to take sides. The sportsbook does this by creating odds and then moving the odds to try and match the betting action.

DraftKings has been able to increase its position by promoting multiple parlay bets, including parlays within the same game. Parlays are when a bettor combines several bets into one bet to get better odds, but must see them all win in order to be paid. However, the retention rate is much higher on these bets as the odds favor the gaming operators.

Meanwhile, next year the company floated the idea that it would add a surcharge to payouts from winning bets in states that have high tax rates on sports betting. The move is considered a bit controversial and industry experts are waiting to see how the big sports betting operators respond to any potential backlash.

Meanwhile, for his daily fantasy business, he simply collects more money than he pays out to contest winners in prizes. Basically, users play against themselves, and DraftKings just gets a fee to create and run the games.

Its app also offers online casino games in several states, such as blackjack, craps, baccarat, roulette and slot machines. For some games, such as live dealer roulette and blackjack, the company benefits from the traditional odds built into the games that favor the casino, while others use random number generators that offer a set payout to the player (RTP).

Riding the wave of legalized online sports betting

Over the years, DraftKings has benefited as more states have legalized online sports betting. It was illegal outside of a few states until 2018, when the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) as unconstitutional after the state of New Jersey challenged the mandate.

New Jersey legalized online sports betting after winning the case, while several other states quickly followed suit. While DraftKings has established a presence in many states with its Daily Fantasy offering, New Jersey and these states would be the first markets it entered with its online sports betting product. Last year, Ohio and Massachusetts legalized online sports betting, while North Carolina and Vermont legalized it this year.

Entering each new market has resulted in strong revenue growth for DraftKings. The company traditionally spends a lot of money on marketing and promotions to acquire customers when entering a new state. However, with brand recognition now quite high nationally, newer states have seen faster customer acquisition and become profitable faster.

As the company begins to scale back marketing and promotions in established markets, DraftKings should see profits begin to increase.

Image source: Getty Images.

DraftKings is currently not in three very large US states

DraftKings currently offers sports betting in 25 states and Washington DC, covering approximately 49% of the US population. It is also located in Ontario, Canada, home to 40% of Canada’s population.

However, it is not in the three largest US states: California, Texas, and Florida.

Florida has legalized online sports betting, but only through the Seminole Tribe, which owns Hard Rock Bet. With the Supreme Court recently refusing to hear a case challenging this arrangement and the Seminole Tribe being required to take 60 percent of all revenue from any trade deal, the chances of the company entering Florida are slim.

California, meanwhile, has voted down two ballot initiatives to legalize online sports betting in 2022. The state may try to involve tribes to eventually try to get it passed, though there are 100 tribes in California that would have to to be part of a revenue sharing. agreement DraftKings rival FanDuel has also talked about commercial companies and tribes working together to help legalize online sports betting in the state. However, the process will likely take several years.

While entry into Florida seems distant and California seems far away, Texas could be the biggest near-term opportunity for the company. The state proposed legalizing online sports betting in 2023, but after the Texas House of Representatives passed the legislation, it failed to pass the Senate. However, the issue will likely be revisited next year in the hope that it will pass.

With more than 30 million inhabitants, Texas is the second largest state in the US and represents about 9% of the country’s population. It is also a huge sporting state. As such, there will be a big opportunity for DraftKings when the state finally legalizes online sports betting.

Should investors buy the stock?

DraftKings continues to grow rapidly while also experiencing a lot of operating leverage as many of its markets mature. It’s getting better economy and returns as it enters new states and sees better retention rates as it promotes and guides users to place more parlay bets.

With Texas potentially legalizing online sports betting next year and a potential boost from its winner’s surcharge, now seems like a good time to buy stocks ahead of those potential tailwinds.