DraftKings: Leading Share Not Enough to Warrant a Moat Amid Regulatory and Competition Uncertainty

We have initiated coverage on DraftKings DKNG with a $26.50 fair value estimate (though shares trade 10% above our intrinsic value) and a no-moat rating. DraftKings has taken its prowess in fantasy sports, which it established in 2012, and leveraged it into one of the leading revenue shares in the U.S. sports and iGaming market, with it, FanDuel, and no-moat MGM combined holding 70%-80% of the market.

That said, we don’t believe DraftKings has a moat, as the U.S. digital gaming industry faces uncertain regulation and competition. To this point, U.S. sports and iGaming wagering are regulated at a state, not federal, level, which leads to varying tax structures (that can change over time), license fees, number of operators, location access (whether allowed offline and/or online), and overall legalization. Further, regulations in the U.S. classify fantasy sports as a “game of skill” and sports betting as a “game of chance,” allowing the former to compete for wagering activity without needing state legalization. Also, competition remains intense, as Fanatics and ESPN sports betting launches in 2023 present new and meaningful long-term competition.

To remain relevant over the long term in the U.S. sports betting and iGaming market (a $40 billion market by the end of this decade, on our estimate, from about $12.5 billion in 2022), we think DraftKings will need to continue to invest behind its offering. On a positive note, DraftKings’ in-house technology platform (acquired in 2020) affords it more control leveraging customer data and launching new products. Further, the company’s net cash position and ensuing estimated positive free cash flow in 2025 should grant it latitude to invest more resources behind its brand. But we view DraftKings’ lack of physical casinos and media assets as a disadvantage to those peers with such an omnichannel presence, as it limits its ability to accumulate consumer data as well as cross-sell across various distribution channels.