DraftKings Stock Price Tumbles as Prop 27 Appears Likely to Fail in CA

DraftKings stock price tumbled this week after the Wall Street Journal reported on Monday that the Prop 27 campaign pulled ad spending to support the sports betting initiative leading up to the Nov. 8 election.

The Wall Street Journal noted that the Prop 27 campaign pulled close to $11 million in broadcast and cable TV ads leading up to Election Day. DraftKings and FanDuel are among the sportsbook operators who’ve fueled the Prop 27 campaign to the tune of more than $169 million in funds raised.   

Clearly, the notion that DraftKings won’t get a chunk of the potential $3 billion California online sports betting industry any time soon is affecting its stock prices.

DraftKings (NASDAQ: DKNG) opened trading at $16.57 per share Monday and closed at $14.28. DraftKings continued its downward trajectory, trading as low as $12.64 on Thursday before closing at $13.24. Before this week’s tumble, DraftKings stock had spiked 8.8% on the news of a possible partnership with ESPN last Friday. 

Prop 27 would legalize online sports betting in California, which is the most populous state in the US with close to 40 million residents. But findings from a recent Berkeley IGS Poll revealed that both Prop 26 and Prop 27 sports betting initiatives are likely to fail next month.

Prop 26 would allow for in-person sports betting at California Indian casinos and the state’s four licensed horse racetracks.

The dueling initiatives had relied on aggressive TV ad campaigns to attack each other, and that strategy may have backfired for both. Of the IGS poll respondents, 53% said they’d vote no on Prop 27 and 42% indicated they would vote no on Prop 26.

“These results suggest that the sports wagering initiatives are foundering in the face of the opposition advertising campaigns,” IGS co-director Eric Schickler said in a press release. “The lack of support among key demographic groups makes passage of each an uphill climb, at best.”

Also: This means bettors wouldn’t be able to take advantage of what would surely be lucrative California sportsbook bonuses any time soon.

Perilous Path to Profitability 

Even with more states coming on board with legal sports betting, profitability has proven to be elusive for sportsbook operators due to the high costs of customer acquisition after state launches. 

Customer Acquisition Cost (CAC) is the most important figure to analyze especially when it comes to sportsbooks hemorrhaging cash during the months immediately following a launch. One sportsbook executive likened this to a three-month arms race. Publicly traded companies like DraftKings and FanDuel are obligated to reveal CAC details.

Industry watchdog Captain Jack Andrews told California Casinos earlier this year that commercial sportsbooks were making a concerted effort to reduce their CAC from more than $300 per person to under $200. Sustainability was starting to become a concern in the sports betting industry.

FanDuel became the first major sportsbook operator to declare a quarterly profit back in August. Parent company Flutter Entertainment announced in its 2022 Q2 report that FanDuel had a 51% market share as the top sports betting app in the US. It also noted that FanDuel’s cost per player acquisition was under $300, another critical factor in its Q2 success.

This week, Flutter (PDYPY) began trading Monday at $57.19. It closed up at $58.22 on Thursday. As for DraftKings, one Wall Street analyst sees better things on the horizon with a forecast predicated on profitability in the near future.    

“DraftKings thinks they have enough cash on their balance sheet to be investing and acquiring customers in the same manner they are now to eventually get to profitability in 4Q of ’23,” Needham & Company Managing Director Bernie McTernan told Yahoo Finance. “And we think full-year profitability in fiscal ’24.”