DraftKings treads water in Q1 but pricing questions persist

In the wake of adverse sports outcomes, DraftKings has nevertheless achieved a notable earnings boost this quarter, showcasing resilience amid market fluctuations.

DraftKings recorded a remarkable 20% increase in revenue for Q1 2025, despite facing negative results in major sporting events for the second consecutive quarter. This upturn can largely be attributed to the company’s core value drivers and effective market strategies.

The historical performance during March Madness significantly impacted earnings, with higher-seeded teams winning at an astounding 82% rate, the highest recorded in the NCAA Division I men’s basketball tournament. DraftKings reported that this trend adversely influenced revenue, resulting in a negative impact of approximately $170 million and $111 million on adjusted EBITDA year-to-date.

To navigate these challenges, DraftKings’ expert team of quantitative analysts meticulously analyzed historical betting data across various markets. The company faced similar headwinds at the end of the NFL regular season when favorites often triumphed, echoing patterns observed in last year’s NCAA tournament where higher seeds won 69% of the time.

“Our analyses give us strong confidence that the recent volatility we’ve experienced is random in nature,” said DraftKings CEO Jason Robins during the Q1 earnings call.

The Intersection of Structural and Actual Hold

Following the cancellation of March Madness in 2020 due to the COVID-19 pandemic, the percentage of wins by higher-seeded teams has consistently surpassed 66% over the past five years.

Pre-pandemic figures showed higher seeds advancing at rates of 68% and 69% in 2018 and 2019, respectively, according to DraftKings’ data.

From the outset of the earnings call, Robins addressed the concerning trends stemming from unfavorable sports outcomes, responding to an analyst’s question that highlighted these issues.

Win percentage by higher seed in the NCAA tournament:

2018: 68% 2019: 69% 2020: N/A 2021: 69% 2022: 67% 2023: 70% 2024: 69% 2025: 82% (!)

[Data sourced from DraftKings]

— Ryan Butler (@ButlerBets) May 8, 2025

One theory discussed by Robins revolves around the burgeoning influence of Name, Image, and Likeness (NIL) agreements within collegiate sports. Two years ago, favorable outcomes during March Madness contributed approximately $20 million to DraftKings’ revenue, buoyed by the emergence of mid-major teams like San Diego State and Florida Atlantic in the Final Four.

With lucrative NIL deals attracting star players to elite programs, such as Cooper Flagg’s endorsement with New Balance despite Duke’s longstanding affiliation with Nike, the landscape of college basketball may shift dramatically.

Ahead of the Sweet 16, Flagg noted that team members at #Duke have received backlash from bettors on social media. “We just kind of see it and laugh at it,” he remarked. #MarchMadness pic.twitter.com/GN6h0q7PWZ

— Matt Rybaltowski (@MattRybaltowski) March 26, 2025

If this theory holds, it could transform traditional patterns of favoritism in March Madness. Nonetheless, Robins maintains that customer behavior will likely continue to lean towards favorites, a long-standing trend within the gambling industry.

DraftKings demonstrated a structural hold of 10.4%, contrasted by an actual hold of 9.5%. Should NIL trends persist, Robins indicated that the company could optimize its betting lines accordingly. “If that happens, our model will adapt, and the two metrics will converge,” he explained.

In response to these evolving dynamics, DraftKings is adopting AI-driven approaches to pricing and risk management, aiming to enhance efficiency and scalability. Robins highlighted the promising results from in-game betting following the acquisition of micro-betting platforms like Simplebet, SportsIQ, and Mustard Golf, revealing an increase in customer engagement. For instance, live betting in baseball now constitutes around 36% of DraftKings’ total volume.

Mixed Results for DraftKings

For the quarter ending March 31, DraftKings reported revenues of $1.41 billion, slightly below analysts’ expectations of $1.45 billion. However, the company recorded an adjusted EBITDA of $102.6 million, surpassing forecasts of $98.9 million, while earnings per share met projections at $0.12.

In light of the ongoing challenges, DraftKings adjusted its 2025 revenue guidance to a midpoint of $6.3 billion, projecting a range between $6.2 billion and $6.4 billion—down from its previous estimate of $6.3 billion to $6.6 billion. The company anticipates adjusted EBITDA between $800 million and $900 million, revised from an earlier range of $900 million to $1 billion, while also forecasting a structural hold below 11% for Q3.

For Q1 2025, excluding debt factors, DraftKings faced a negative cash flow of $238.8 million, primarily due to share buybacks. However, CFO Alan Ellingson noted, “A healthy balance sheet supported share repurchases in Q1. It was a misleading comment.” @stevebrubaker pic.twitter.com/TID6eNKI6p

— Blackmrprophet74, CPA (@Blackmrphophet) May 9, 2025

DraftKings is not alone in grappling with the impact of March Madness outcomes. Many leading sportsbooks have acknowledged similar challenges during earnings discussions.

Nonetheless, these patterns raise critical questions regarding DraftKings’ pricing strategies and algorithmic proficiency. Analysts have cautioned that while one-off external events may be dismissible, sustained poor performance could necessitate a re-evaluation of their pricing models.

Key Insights from DraftKings’ Q1 Earnings Report

• DraftKings recorded an increase in “monthly unique payers,” reaching an average of 4.3 million users, marking a 28% rise year-over-year. This growth highlights effective customer retention and acquisition strategies across both the sportsbook and iGaming verticals.

• Average Revenue Per Monthly Unique Player (ARPMUPS) stood at $108, reflecting a 5% decrease from Q1 2024. Excluding the impact from acquiring Jackpocket, ARPMUPS increased by approximately 7% compared to the previous year.

Key Takeaways from $DKNG’s Earnings Call

– Core value drivers are outperforming expectations, with advancements in product features leading to improved structural hold percentages and more effective promotional strategies.

– Revenue growth is projected to reach 32% year-over-year this fiscal year… pic.twitter.com/zSbjuucPUE

— AlphaSense (@AlphaSenseInc) May 9, 2025

• Robins also addressed emerging trends in prediction markets, expressing that DraftKings will closely monitor developments, including ongoing legal cases and insights from regulatory bodies and tribal gaming entities.

• The company is optimistic about its positioning within the evolving macroeconomic landscape. Notably, online gaming showed resilience during previous financial downturns.

• Following regulatory changes, Jackpocket ceased operations in Texas, and will also exit the New Mexico market. While hopeful about Jackpocket’s profitability prospects this year, Robins acknowledged potential challenges due to these market changes. The integration of Jackpocket into the DraftKings ecosystem is expected later this year.

Overall, DraftKings remains committed to its core value drivers, with metrics exceeding company forecasts. The firm points to enhancements in its product offerings as key contributors to improved structural sportsbook hold percentages and more efficient promotional investments. DraftKings’ handle grew by 16% year-over-year to reach $13.9 billion, showcasing solid performance in established markets.

Market Reaction

Leading up to the earnings call, DraftKings encountered several downgrades from financial analysts, with notable adjustments from major institutional investors like BlackRock Inc. As of March 31, BlackRock reduced its DraftKings holdings by 8,072,754 shares, amounting to a 25.9% decrease.

Institutional investors now own approximately 80.2% of DraftKings’ shares, according to data from Yahoo Finance. Following the earnings announcement, DraftKings shares fluctuated, trading at $35.35 in after-hours trading and reaching highs up to $37.60 before settling at $36.50 by mid-morning on Friday.