The war for sports gambling dollars officially has two sides: the companies that were first to market vs the companies that have brand and legacy behind their names.
There are examples both for and against the maxim that first movers have market advantage, but the true competition for dollars only begins once the industry has matured enough for second movers to gain some sort of foothold.
And if those second movers have dominated previous versions of that market then the first mover advantage is especially in peril.
DraftKings (DKNG) finds itself in that very position in 2022.
When the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act that banned sports gambling in all but a handful of states in 2018, DraftKings and FanDuel were two of the companies ready to immediately take advantage.
The pair flooded the airwaves with advertisements of the next couple of years, vacuuming up as much of the new market as they could while the big casinos in Las Vegas were still building their sports gaming platforms.
That advantage, plus the merger between DraftKings and FanDuel, helped push the stock above $73 per share and a valuation above $20 billion.
But now with Caesars (CZR), MGM (MGM), Wynn (WYNN) and Penn National (PENN) all focusing on their own platforms, DraftKings' valuation is less than half of what it was as its share price has shrunk below $20 per share.
DraftKings Downgraded on Competition Concerns
Analysts at Argus Research downgraded DraftKings to hold from buy, sending the stock tumbling more than 8% at last check Monday.
"DKNG is facing fierce competition from MGM and Wynn, which are expanding their online sports betting operations, and in our view needs to strengthen its marketing efforts. We also expect revenue growth to slow in 2022, as fewer states approve online sports betting," analyst John Staszak said.
The Las Vegas options have more than just legacy on their side. They also have loyalty programs that offer free rooms, food, and tickets to entice online gamblers similar to the way they entice the gamblers that walk into their casinos.
The firm points out that DraftKings' net loss is rising despite increased spending on sports gambling. But it's not as it DraftKings hasn't also benefitted from rising gambling interest, as the company reported a 47% increase in revenue to $473 million as the number of monthly unique players increased 32%.
However, the company faces not only increased competition from Las Vegas rivals, but also faces risks from changing consumer spending trends and potential regulatory developments, according to Argus, which has a "medium" financial strength rating on the company.
U.S. Sports Gambling Market is Growing
Americans were betting as much as $150 billion on sports every year when it was illegal outside of Nevada, the American Gaming Association has reported.
States brought in over $700 million in tax revenue between June 2018 and November 2021, according to LegalSportsReport.com.
This has led DraftKings to increase its revenue guidance for 2022 to between $1.85 billion and $2 billion, up from its previous view between $1.7 billion and $1.9 billion, implying growth between 43% and 54%.
But if DraftKings takes Argus' advice and increases its advertising spend to combat the constant deluge of ads consumers see from Caesars and MGM, the cost of acquiring that revenue could lead to even wider losses.
Whether investors stick around with yawning losses when there are safer bets will determine whether DraftKings can return to dominance in the U.S. over the long term.
