Draft Kings stock (NASDAQ: DKNG) has been making headlines after the 30% gain this month supported by key factors including the legalization of sports betting, Michael Jordon’s election as a special advisor, and an overall surge in online business due to the pandemic. Currently, Draft Kings’ market capitalization of $19 billion is nearly half of Las Vegas Sands’ $35 billion (Enterprise Value of LVS = $46 billion) despite a low entry barrier in online gaming, and a balance sheet loaded with intangible assets and goodwill. The market is pricing DKNG stock at a P/S multiple of 43 as compared to just 2.6 for Las Vegas Sands. Draft Kings is growing in the sports betting & iGaming space with a total addressable market size of $40 billion in the U.S. and $70 billion globally, and a substantially higher P/S multiple is warranted. However, Trefis believes that Las Vegas Sands stock offers better odds than Draft Kings, supported by 18 months of cash runway and Macau’s mass market gaming’s higher profitability. In this article, we compare Draft Kings with Las Vegas Sands and key financial and growth metrics to highlight the risks & rewards of investing in Draft Kings’ stock.
Sports Betting & iGaming Market Is Likely To Remain A Highly Contested Space
Per DKNG’s analyst presentation, the company’s revenues are expected to expand at a CAGR of 31% from $432 million in 2019 to $700 million by 2021. In 2019, the national sports betting revenue topped $909 million, nearly doubling within a year. Draft Kings expects to achieve a 20-30% share of the $18 billion sports betting market and 10-20% of the $21 billion iGaming market at maturity in the U.S. Thus, the company’s revenues could reach nearly $5 billion in the long run.
Broadly, the U.S. sports betting and iGaming market at maturity is comparable to Macau Gaming Market of $36 billion. In 2019, Las Vegas Sands reported $7 billion of casino revenues from Macau – representing a 20% share of the Macau Gaming Market. With only six concessionaires, the threat of new entrants is substantially low in Macau as compared to the U.S. sports betting & iGaming industry, which is already being contested by prominent names including, Fanduel, bet365, HardRock Café, BetMGM, and William Hill.
Draft Kings P/S multiple to decline with rising top line, but the stock looks overvalued compared to Las Vegas Sands
Considering DKNG’s $5 billion of revenue generating capacity and the current stock price, Draft Kings’ P/S multiple turns out to be 3.6 – much higher than Las Vegas Sands’ current P/S multiple of 2.6. The price-to-sales, or P/S, multiple for a company is higher when sales growth is higher, and it demonstrates the ability to consistently translate those sales to profits. At $3.6 billion of net revenues, Draft Kings expects its EBITDA to reach $1 billion in the next five years – implying an EBITDA margin of 20%. Interestingly, Las Vegas Sands’ EBITDA margin of 38%, supported by 23% of mass-market casino win in Macau, is much higher than Draft Kings’ projected margin – indicating a lower casino win rate in the online betting space. Las Vegas Sands’ stock has declined by 33% since the beginning of the year and the company has 18 months of cash runway to weather the coronavirus crisis. Despite the sports betting frenzy, we believe that Draft Kings’ stock looks pricey as compared to Las Vegas Sands.
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