DraftKings ‘has enough cash on the balance sheet’ to acquire costumers: Strategist

Needham & Company Managing Director Bernie McTernan joins Yahoo Finance Live to discuss the score on sports betting companies during the NFL season.

Video transcript

- With week three of the NFL season all but in the books, let's bring in Needham Company managing director Bernie McTernan to break down the betting landscape thus far into the football season. Also with us is Yahoo Finance's Josh Shafer. Bernie, a lot of some big upsets over the weekend. A lot of people may be counting their losses.

BERNIE MCTERNAN: Yeah. Well, so we think-- we estimate that was probably a normal hold for the sportsbooks this past weekend. It wasn't necessarily great for my wallet. But yeah, with the Bills, with two of the most like team, the Bills and the Chiefs going down. But overall, we think it was a normal hole for the sportsbook.

The other thing that's hitting as well too is the unders that's been hitting at a higher than 60% rate. Actually pretty similar to last year. But what we focus on, what we think matters the most is the five highest spreads. And back to week one, over the first three weeks, the favor has won three or four of those, depending on the week.

And so that generally points to a normal hold for the operators. So that's in line with DraftKings guidance. And then we look at company like Genius Sports. It's actually ahead of or better what they expected. They assumed a hold similar to last year, which was a headwind for the industry. Genius, as you guys have been talking about, dealing with FX headwinds. But at least the game outcomes are better than what's contemplating their guidance.

- And as far as other numbers that you're looking at is where gamblers are going and what platforms they're using, I know you pointed out in your most recent note that DraftKings have been the most popular app on iOS. I'm just curious if that was surprising at all compared to maybe FanDuel, which I think we understand, has more market share nationwide. Is it surprising at all see DraftKings there? What do you think's driving that?

BERNIE MCTERNAN: Yeah, no. It's pretty consistent with last year if you look at the iOS App Store. DraftKings and FanDuel are really in that top tier together, really jockeying for that one and two spot for the top sportsbooks app in the sportsbook section of the App Store. And then MGM is really in the third category. And that's followed by Barstool and Caesars below it.

And that really held true for most of last year too. The one difference was when New York launched and Caesars made a big marketing promotion to really try to take share in New York. Caesars actually went up to the number one app. But that was short lived. If you look at after the NFL's season and the NFL pre-season, they went back to that number four or five range, where they are currently.

So it really seems to be shaping up the way it was last year. And that's a big investor question we get is what the long term market share of this industry looks like. And we continue to think DraftKings, one of the reasons why we have a buy rating on the stock, is that we think that just their scale begets better technology, which could be a differentiating factor and a reason why customers keep returning to the platform.

- And when we talk about the stocks themselves, we like to talk about spending and the promotions that these different companies are kind of putting out there. Is DraftKings promoting more than, say, a FanDuel? How are you evaluating the promotions through the first couple of weeks? And who's maybe promoting the most? And how's that kind of driving the market share?

BERNIE MCTERNAN: Yeah. Look, it's a great question. We have $800 million of EBITDA loss this year for DraftKings that peaking in the third quarter over $300 million loss. And a lot of that spending is going on sales and marketing. In general, the promotional environment seems a little bit less intense than last year, especially because the Caesars where I spoke about before, how they were really intense with the New York launch and then faded back.

But DraftKings and FanDuel, they've been saying that they're going to keep spending against their thresholds. So with DraftKings, that's a two to three year customer payback on gross margin. And both of those companies haven't backed away in terms of how much they think they're willing to spend.

DraftKings thinks they have enough cash on their balance sheet to be investing and acquire customers in the same manner they are now to eventually get to profitability in 4Q of '23. And we think full year profitability in fiscal '24. So no real change from the top two. It's just more Caesars I think we're seeing them back off a little bit relative to the peaks of last year.

- Finally, Bernie, from an investment standpoint, where do you see the biggest upside? I mean, which one of these companies offer the most value for the price that's trading at?

BERNIE MCTERNAN: Yeah. I mean, frankly, there's three companies that we have buy ratings on, that I would suggest here. DraftKings, Penn in junior sports. On DraftKings, it's really for the investor that's willing and able to take that two to three year time horizon.

When you're able to look at '25, '26 EBITDA, put a multiple on to discount it back. With Penn, they're generating profitability. Now, they have the core regional casino business. But even their interactive segment, it's only going to be a $50 million drag this year. The core US is going to be at least break even.

And we think that that's a unique opportunity to play this space and really leveraging that convergence between sports betting and sports media. And then lastly, I mentioned earlier with Genius Sports as the data provider. And really, they're using their data contracts to create other businesses. So if you're watching Prime Video on Thursday night and you'll see that Prime cast the alternative broadcast, well, a lot of that is powered by Genius technology.

They also have a ad serving capability, where they're helping sportsbooks acquire customers. So really leveraging that data relationship with the leagues and the sportsbooks to create a whole other revenue streams about it. So those are three picks that I would highlight in the sports betting landscape that we're bullish on.

- Well, Bernie, here's hoping for a better week four maybe for your wallet. Bernie McTernan, Needham Company managing director. Always good to have you on the show.