DraftKings' March Madness Miss: Wall Street Sees +50% Upside

Key Points

• DraftKings' latest results disappointed some investors as the firm had to lower its 2025 revenue guidance by over $100 million.
• However, several key silver linings exist in the firm's results, as abnormal events hurt its performance and outlook.
• The company's continued user growth and potential geographic expansion remain key positives.

During an earnings season where analysts expected many companies to lower guidance, darling gambling stock DraftKings NASDAQ: DKNG was one that had to do just that. Even as shares are down nearly 34% from their all-time high reached in February as of the May 21 close, DraftKings stock is still up more than 150% over the past three years.

DraftKings has seen an explosive rise in the popularity of its platform over the last several years. At the end of 2020, the company had about 900,000 monthly unique payers (MUPs). This number shows how many users placed a bet on its platform in a month. MUPs have more than quadrupled since, coming in at 4.3 million in the most recent quarter.

Despite this, lowering guidance is never something investors want to see. So, what is in store for this consumer discretionary name going forward?

Is DraftKings still well-positioned even after lowering its expectations for 2025? This analysis will dive into the details of the company’s most recent report and provide a perspective on the stock’s outlook.

DraftKings Gets Slapped By Revenue and Guidance Double Whammy

Not only did DraftKings have to lower its revenue guidance for 2025, but it also missed revenue estimates in the first quarter. The company’s revenue came in at just over $1.4 billion for a growth rate of 20%.

This was slightly less than 2% slower than the nearly 22% growth Wall Street analysts anticipated.

The company also lowered its guidance by around 2% at the midpoint to $6.3 billion, equating to a decrease of $150 million. However, this news has multiple silver linings.

March Madness Bettors Dunk on DraftKings: 3 Silver Linings

DraftKings tackled its weak guidance at the start of the earnings call. They said, “If not for customer-friendly sports outcomes in March, we would be raising our fiscal year 2025 revenue and adjusted EBITDA guidance.” EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is commonly used to assess the profitability of firms like DraftKings that have yet to generate positive net income.

In this statement, DraftKings refers to negative betting outcomes that occurred against it during the college basketball March Madness tournament, the largest sports betting event in the United States.

When gamblers win their bets, DraftKings is on the losing end as the bookie, which is exactly what happened in this year’s tournament.

Sports bettors tend to spend more money on the favorite, or the team with a higher chance of winning, than on underdogs. Thus, DraftKings can make a lot of money when those favorites lose. However, during this March Madness, higher-seeded teams, which are typically favorites in their matchups, won their games 82% of the time.

This was the highest rate ever recorded, causing DraftKings to lose an unprecedentedly large number of bets.

However, the key takeaway is that March Madness 2025 represented a betting anomaly. It also wasn’t a problem exclusive to DraftKings, and it doesn’t indicate an underlying weakness in the company. Flutter NYSE: FLUT, the owner of FanDuel, experienced the same issue.

If this anomaly hadn’t played out, DraftKings would be raising both its revenue and profitability guidance.

The second silver lining is that DraftKings stock rose over 2% after its earnings release. This demonstrates that Wall Street wasn’t scared away by the company’s unusual plight in the quarter. Lastly, Wall Street analysts tended not to move their price targets much in reaction to the results.

Among analyst updates tracked by MarketBeat after the May 9 release, the average drop in DraftKings' price targets was less than 1%. Additionally, the average of those new price targets comes out to more than $55 per share.

This figure implies a 55% upside in DraftKings shares compared to their May 21 closing price.

DKNG: Improving Underlying Metrics and Expansion Potential Provide Favorable Outlook

Despite recent issues, DraftKings looks like it will still be well-positioned going forward. The company grew its MUPs by a brisk 28% in the quarter, and the company still expects its adjusted gross margin to increase by 300 basis points in 2025 over 2024.

Wall Street price targets remain very bullish, and DraftKings still only offers online sports betting in around half of the U.S. states. This provides a substantial opportunity for expansion long-term.