Betting on DraftKings

Case Summary ARK Investment Management LLC (ARK)s Next Generation Internet ETF (exchange traded fund) accumulated over 5 per cent of the outstanding shares of DraftKings Inc. (DraftKings), which held 24 per cent of the emerging US online sports betting market. Following the legalization of sports betting in May 2018, DraftKings faced escalating competition as competitors spent heavily on advertising and promotions to attract customers. This spending led to increasing quarterly operating losses, and DraftKings stock fell about 75 per cent below its fifty-two-week high. ARK needed to re-evaluate its investment to understand whether the stock markets recent revaluation was a warning sign regarding DraftKings ability to weather the competition or just a new opportunity to buy more of an undervalued stock.

Case Questions: 1. Explain DraftKings business model. What is the expected return (win %) on sports betting from a sportsbooks and bettors perspective? 2. Describe the current state of the US sports betting and explain exhibit 3. 3. Assess the companys financial performance. How can future revenue growth and profitability be forecasted? What guidance does management provide? 4. Based on your DCF valuation model what is the value of DraftKings? Include in your analysis different scenarios by varying key accounting variables?