DraftKings Q1 Profits Could Be Damped by March Madness
Favored teams performing well in the NCAA men’s and women’s basketball tournament might negatively impact sportsbook operators, such as DraftKings (NASDAQ: DKNG), in their first-quarter earnings.
In a note to clients on Monday, Needham analyst Bernie McTernan warned that the absence of surprises in the 2025 March Madness compared to previous years could spell trouble for DraftKings and similar companies, as public bettors tend to prefer wagering on favorites rather than underdogs.
"The strong performance by the favorites is generally bad for the sportsbooks, which can be seen by the last week in New York posting a 1.6% hold, the second worst in state history and only the third time the hold was below 2%,” observes the analyst. “As a result, we are lowering our 1Q revenue estimates (on DraftKings) by roughly -$100 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by roughly -$70 million to +$74 million.”
The analyst maintains a “buy” rating on DraftKings with a price target of $65, suggesting the stock could almost double from the current closing price of $32.88.
March Madness Outcomes Could Reverse Super Bowl Momentum
The Super Bowl turned out to be yet another low hold event for DraftKings and its rivals as the favored Philadelphia Eagles triumphed, covered the spread, and the over was achieved — a ideal mix of appeal for public bettors.
Nevertheless, experts generally contend that gaming firms compensated for those outcomes by profiting from prop bets and using the Super Bowl as a means to acquire new clients. McTernan cautioned that some of the momentum gained by DraftKings and competitors after the Super Bowl might be reversed if favorites perform well in March Madness.
Certainly, they did. The men's Elite Eight included seven one and two seeds, with all the one seeds moving on to the Final Four. The lowest-seeded team to reach the Sweet 16 was the 10 seed Arkansas.
The women's bracket showcased more balance, with two three seeds and two five seeds making it to the Sweet 16; however, in a twist favorable for bettors but unfavorable for sportsbooks, the stronger teams ultimately prevailed, resulting in an Elite Eight made up solely of one and two seeds. This led to a Final Four featuring three one seeds and the champion UConn, which was a two seed.
Q2 Begins Well for DraftKings
Although favorites succeeding in a prominent event like the NCAA Tournament isn’t advantageous for sportsbook operators such as DraftKings, Needham’s McTernan noted that operators might begin the second quarter positively since Duke — a team widely supported by the public — was defeated in the national semifinals on Saturday by the University of Houston.
Duke became the first team in NCAA Tournament history to lose a game while having a higher shooting percentage than its opponent, fewer turnovers, more free throw attempts, additional assists, and greater steals.
Houston's progression to the championship match has another intriguing gaming-related consequence. If the Cougars triumph over the Florida Gators this evening, Tilman Fertitta will secure victory in Bloomberg’s “2025 March Madness Brackets for a Cause” contest. The soon-to-be ex-leader of the Golden Nugget casino empire and the biggest shareholder in Wynn Resorts (NASDAQ: WYNN) is competing for Rainforest Friends for the Future Foundation.
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