The battle for dominance in the US online sports betting market is heating up between DraftKings and Flutter Entertainment, the parent company of FanDuel. After both companies reported their second-quarter financial results, analysts are closely scrutinizing their performance to determine the future of the industry.
Needham analyst Bernie McTernan reiterated a Buy rating on DraftKings with a $60 price target, citing several key factors. According to McTernan, the greatest point of contention between bullish and bearish investors is the company’s adjusted EBITDA targets, the high tax surcharge, and the intense competition.
McTernan believes that the total addressable market size for US online sports betting is larger than initially anticipated, a factor that some investors are using as a bearish argument against DraftKings. However, he contends that DraftKings has the potential to achieve its adjusted EBITDA guidance by utilizing multiple strategies, while the market appears to be undervaluing the company.
One potential advantage for DraftKings is Flutter’s decision to reduce promotions in Illinois, which could allow DraftKings to lower its marketing expenses in the region. However, DraftKings faces a challenge with its lower hold rate compared to Flutter’s FanDuel, raising questions about how long it will take to catch up. McTernan believes that FanDuel possesses a structural advantage in this area.
The issue of surcharges on winning bets in high-tax states is another point of contention. While DraftKings initially announced a surcharge, it later backtracked after receiving negative feedback from consumers. This decision, announced shortly after Flutter confirmed it had no plans for a similar surcharge, has raised questions about the company’s ability to address industry challenges.
DraftKings’ bears argue that high state taxes pose a significant risk to the sports betting industry and that Flutter’s decision regarding surcharges could set a precedent for the industry, potentially solidifying Flutter’s position as the leader.
Despite these challenges, McTernan remains optimistic about DraftKings’ long-term prospects. He believes that both DraftKings and Flutter possess a technological advantage in the sports betting segment, with operators focusing on technology and product differentiation rather than price competition. While a long tail of competitors exists, McTernan believes the market is increasingly functioning as a duopoly, leading to limited competitive intensity.
However, he acknowledges that Flutter’s unwillingness to ease up on customer acquisition could hinder DraftKings’ ability to increase its margins. Nonetheless, McTernan believes that DraftKings’ technology stack ownership and national marketing reach will ultimately help it scale its margins.
As the online sports betting market continues to evolve, the battle between DraftKings and Flutter will undoubtedly be a closely watched race, with EBITDA targets, surcharges, and competition likely to remain key factors in determining the victor.
