Stock market scum sign, last week DraftKings Inc. (NASDAQ: DKNG), an American online betting company with annualized revenue of around US $ 1.2 billion and annualized EBITDA loss rate of around US $ 380 million, reportedly offered US $ 22 billion for the British gambling company Entain plc. This offer for Entain represented a 100% increase over a proposal made by MGM Resorts International just eight months ago.
Online sports betting is a very popular investment industry with strong growth prospects, and DraftKings is one of the few publicly traded ways to gamble in this industry. Indeed, consultancy firm Market Research Future estimates that the global online sports betting market could reach nearly US $ 60 billion in 2026, up from around US $ 25 billion in 2019, a compound annual growth rate of 13 to 14%.
However, there are many established and deep-pocketed competitors in this space, and the valuation of DraftKings seems quite strained, even in the context of a growing industry.
DraftKings revenue is expected to grow rapidly. Consensus analysts’ estimates according to Capital IQ predict that 2021 revenue is expected to reach around US $ 1.3 billion and for 2022 revenue of around US $ 1.7 billion, representing growth of around 30% d ‘year after year.
However, the company’s revenue growth has so far only translated into significant losses in Adjusted EBITDA. This shortfall was US $ 95 million in 2Q 2021, an annualized execution rate of US $ 380 million.
|(in thousands of US dollars, excluding outstanding shares)||2Q 2021||1Q 2021||4Q 2020||3Q 2020||2Q 2020|
|Returned||$ 297,605||$ 312,276||$ 322,223||$ 132,836||$ 74,998|
|Adjusted EBITDA||($ 95,302)||($ 139,262)||($ 87,884)||($ 197,079)||($ 59,817)|
|Adjusted EBITDA margin||-32%||-45%||-27%||-148%||-80%|
|Operating result||($ 321,554)||($ 153,108)||($ 268,338)||($ 348,357)||($ 324,791)|
|Operating cash flow||($ 98,624)||($ 77,751)||($ 96,584)||($ 106,320)||($ 134,971)|
|Cash||$ 2,646,500||$ 2,818,128||$ 1,817,258||$ 1,140,907||$ 1,244,266|
|Debt||$ 1,324,442||$ 1,327,294||$ 81,612||$ 0||$ 0|
|Fully Dil. Shrs. Outside. (Millions)||430.3||429.0||427.8||425.4||392.8|
DraftKings’ enterprise value (EV) is around $ 20 billion, implying that its EV / 2022E revenue ratio is close to 12x, a huge multiple for any growing business. The multiple is particularly remarkable given the company’s substantial EBITDA deficits.
Entain, a company with a larger revenue base than DraftKings, is trading at a much cheaper valuation multiple. It achieved $ 2.4 billion in revenue in the first half of 2021, implying that DraftKings’ takeover bid for Entain is roughly a multiple of 5 times revenue. Unlike DraftKings, Entain is currently generating positive EBITDA; its EBITDA in the first half of 2021 was approximately US $ 550 million. As a result, if DraftKings were to acquire Entain at roughly its current offer, the transaction would be profitable for DraftKings – only because the positive EBITDA from Entain would help offset the substantial EBITDA losses from DraftKings.
A complication in DraftKing’s offering for Entain is that Entain and MGM are 50/50 joint venture partners in BetMGM. Any deal that would make Entain a competitor to MGM in the United States would likely require MGM’s consent. Accordingly, a condition of a DraftKings-Entain merger could be a requirement that DraftKings divest the stake in BetMGM.
A bigger issue is the difficulty of comparing the current value of DraftKings’ business (around US $ 20 billion) with its advertised bid for Entain (US $ 22 billion). Admittedly, the two companies’ online gambling strategies are somewhat different: DraftKings focuses on fantasy sports, while Entail is a more traditional bookmaker. However, it is curious why, at roughly the same corporate values, DraftKings has much lower revenues and is much less profitable than Entain.
DraftKings Inc. last traded at US $ 50.56 on the NASDAQ.
Information for this briefing was found through Edgar and the companies mentioned. The author has no title or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author does not hold any license.