After DraftKings released its Q2 2024 financial report, Morgan Stanley did a thorough study of the company’s shares. Despite growing revenue as indicated by the data, growing customer acquisition expenditures raise questions about the company’s profitability.
The Q2 2024 adjusted EBITDA estimate provided by DraftKings shows lower profitability, which is mostly due to increased user acquisition costs. The profitability projection has become more cautious, despite a 3% increase in the company’s revenue expectations for the remaining months of 2024. The $538 million initial forecast for DraftKings’ entire 2024 EBITDA was lowered to $400 million by Morgan Stanley. The company’s adjusted EBITDA projections for 2025 and 2026 were also reduced, from $1.25 billion and $2.1 billion to $1.07 billion and $1.8 billion, respectively.
Despite these profitability concerns, DraftKings continues to experience strong customer spending in key markets like New Jersey, Pennsylvania, and Michigan. This has led to increased revenue projections for 2025 and 2026 by 6% and 3%, respectively.
Evaluating DraftKings’ Strategic Model
Morgan Stanley’s report scrutinizes DraftKings’ strategic model, particularly in light of the reduced customer acquisition guidance. The report suggests that investors are increasingly questioning the company’s path to profitability and revenue assumptions. The analysis delves into user economics, examining factors such as payback periods, customer acquisition costs, retention rates, and average spending per active user.
The report acknowledges that while DraftKings’ performance in Q2 2024 may have disappointed some investors, the company has consistently generated revenue that exceeds expectations, fueled by significant user growth. However, skepticism remains about the company’s ability to meet its forward targets, as outlined by management during its investor day.
Recently, DraftKings expanded its operations into the Washington, D.C. area, following a market access agreement with the soccer franchise DC United, further demonstrating its commitment to growth.
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