DraftKings shares tumble as sports betting user growth slows

DraftKings Inc. plunged Friday as the sports-betting company said its user growth slowed in the third quarter.

The number of monthly unique paying customers increased to 1.6 million in the quarter, short of the 2 million that analysts had projected. Customer growth was 22% compared with the prior year, down from 30% in the second quarter and 29% in the first quarter.

DraftKings competes with FanDuel, a division of Irish bookmaker Flutter Entertainment Plc, and other sportsbooks for market share as more U.S. states legalize online sports betting. Investors are wondering whether rapid inflation will affect gamblers’ budgets, though DraftKings says it isn’t seeing an impact from the weakening economy so far.

Shares of DraftKings fell as much as 20%, their biggest loss since Feb. 18. The stock had already fallen 43% this year through Thursday’s close, compared with a 23% drop in the Russell 1000 Index.

The company is also facing pressure from Wall Street to become profitable. After years of pouring money into advertising, DraftKings says it is trying to be more efficient with its marketing. On an earnings call, Chief Executive Officer Jason Robins said the company is shifting its spending from local to national ads as it expands into more states.

Robins said he still expects the company will achieve positive adjusted earnings before interest, taxes, depreciation and amortization in the fourth quarter of next year. However, the initial 2023 guidance calls for a wider loss than analysts had estimated.

Jefferies analyst David Katz said in a research note that “market patience remains thin” in the wait for profitability, even though DraftKings has enough cash on hand that “liquidity should not be a concern.”

The expected failure to legalize online sports betting in California in next week’s election will raise additional questions about how the company can keep growing. Robins said that he doesn’t expect the California referendum to pass.

DraftKings says its forecast assumes it will launch mobile sports betting in Maryland in the fourth quarter of 2022, in Ohio and Massachusetts in the first quarter of 2023, and in Puerto Rico in the third quarter of 2023.

Bloomberg News reported last month that DraftKings is nearing a large new partnership with ESPN, which could widen its audience.