Barron's Streetwise - DraftKings CEO Has Amazon Aspirations

Episode Date: December 18, 2020

The online gambling company's plan for growth. Plus, how to (not) buy insurance. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. We aspire to do a lot more than even what we're doing today. Just a few years ago, the only thing we were doing is daily fantasy sports. Now we're doing sports betting, iGaming.

Certainly in our current category, there's a ton of room for expansion. We have new states that will open up. There's an international play at some point that we're going to take a look at. People laugh a little when I say this, but we aspire to be almost like Amazon in that sense. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Jason Robbins. He's the CEO of DraftKings, a fast-growing player in online gambling, both for sports and for casino-type games. DraftKings has multiplied in value this year. We'll hear more from Jason about why he thinks there's much more growth ahead. He'll also share his top casino

tips. And if you don't gamble, I've got one or two thoughts on how to use casino math in your insurance decisions. You won't need a calculator. Fingers, maybe a few toes, tops. Listening in is our audio producer, Metta. Hi, Metta. Hey, Jack. Metta, tell me about your gambling history. Do you buy lottery tickets? Do you bet on sports? Have you been to a casino? Are you a professional bookmaker in your spare time? What's your experience with gambling? I've been to casinos in Atlantic City, Las Vegas, Copenhagen, and Sierra Leone.

Wow. Sierra Leone, West Coast of Africa, right? That's not a Sierra Leone, New Jersey that I don't know about. No. west coast of Africa. And how did you do? I've done pretty well most of the times I've gambled, weirdly. So I usually go with a friend and our mantra is that you don't have to make money, you just have to not lose too much money. Then you're just paying for the time that you're at the table having fun. The entertainment value. Exactly, yeah. And sometimes there's free drinks, you know, like sometimes. Sounds good. You've got a lot more gambling experience than I do. The first record I ever bought with my own money when I was a kid was The Gambler by Kenny Rogers. And you would think that that would have launched me into a fabulous gambling career. But I've been to casinos only a few times with friends. I've always had fun, but like you,

it was more from the company than the gambling. The problem with casino games is that when I look at them, I don't see games of chance. I see games of certainty. The customer is definitely on the wrong side of probability math and the house is on the right side or else the house wouldn't stay in business. And that makes casino gambling feel to me like I'm making a math mistake. It's fine to do that a little bit, but it's not something I want to do with any regularity. I'd rather own a casino and share in the profits. And in a manner of speaking, I do share in the profits of three casinos because Las Vegas Sands and MGM Resorts and Wynn Resorts make up a tiny part of the S&P 500 index. And I, like many savers, have a stake in

an S&P 500 fund. My gambling aversion does more than keep me out of casinos. It helps me make decisions on insurance because the casino business and the insurance business have some striking similarities. In fact, historically speaking, we can draw a pretty straight line from one to the other. I'll show you. We just have to make a quick trip back to 1654, but we'll be right back. This was the middle of the scientific revolution. A couple of decades after Galileo Galilei worked out that the earth revolves around the sun, and a few decades before, Isaac Newton explained physics, calculus, and other things that universities still charge top dollar to teach.

Anyhow, in 1654, two French mathematicians, Blaise Pascal and Pierre de Fermat, wrote letters to each other discussing a gambling problem, how to fairly split the pot in a dice game if the game was stopped early. Pascal and Fermat worked out how to calculate odds. That's part of probability theory, which casinos still use today. To connect gambling with insurance, we have to jump forward about 40 years to astronomer Edmund Halley. That's a guy Halley's Comet is named for. Halley was interested in how to turn a lump sum of money today into a lifetime stream of payments. That's called an annuity. And annuities were popular at the time, but pricing wasn't especially scientific. And that's a problem. If you charge too little for annuities, the payments will dry up before the customers die.

Haley got a hold of remarkably detailed death records for a city called Breslau, which today is the Polish city of Wrocław. And he combined the death records with the probability math from Pascal and Fermat to make something called a mortality table. That can tell a person their odds of dying before their next birthday. More than 50 years later, around 1750, a British mathematician named James Dodson got turned down for an early form of life insurance because the insurance company didn't offer coverage to people over 45. Dodson wasn't happy. He used Haley's mortality tables to devise a way to base life insurance premiums on age to make coverage more equitable. His plans were soon turned into the first

modern life insurance company called the Society for Equitable Assurances on Lives and Survivorships. It was a different time. People didn't understand yet that companies are supposed to have random nonsense names like bungalow for Cashtango. Anyhow, Equitable Life as it became known had a long run, more than 200 years. It got into financial trouble during the dot-com stock bust because it had issued guaranteed payout annuities linked to stock market returns without properly hedging the risk. Many of Equitable's savers lost money.

The last of the company was sold off just this year. Okay, back to today. Since insurance and casinos are based on similar math, it's important for insurance buyers to know that the odds favor the house. Yes, technically, you might buy life insurance this week and die next week, resulting in much sorrow for your loved ones, but a fabulous return on your investment. But that's not knowable ahead of time. All that's knowable are the odds. And you can assume that the insurance company knows them and will offer a deal that places itself

safely on the profitable side of the odds and you on the unprofitable side. So think of insurance as a penalty you pay for not being rich enough to self-insure. Buy only what you need, and ideally, grow rich enough so that you can stop buying it. Let me give you an example. I just bought two new iPhones for my wife and myself. Apple, of course, offers insurance on them.

It's called AppleCare+. Should I buy it? Definitely not. The loss of a pricey phone would be annoying to me, but it wouldn't be catastrophic. If it would be catastrophic, I wouldn't be buying pricey phones to begin with. And since I know Apple Care Plus is priced to be a statistical money loser for me, I'm not buying it. What about life insurance? Life insurance is a different story. If your death would be a financial burden to someone you love, you should buy some. Consider cheap term insurance, where

you pay for a death benefit only, not whole life or universal life insurance, which builds up investment value, but which can also come with higher fees. The idea is to use the money you save on insurance to build investment value somewhere else, like in low fee stock index funds, so that over time you can grow rich enough to do more self-insuring and to buy less insurance. I hope you grow so rich that you don't need insurance at all. And by that point, you'll have to start thinking about providing your heirs a way to cover estate taxes. It turns out that specialized life insurance can be pretty handy for that, but we'll have to talk about that another day.

Let's get the DraftKings. Meta, I understand we have a listener question. We do. It's from George. Let's hear it. Hey, Jack, this is George from Manhattan, the other Manhattan, Manhattan, Kansas. Do you even know that that exists? I'm embarrassed to say I had to Google it, George. How could I not know about the home of Kansas State University? Go Wildcats, you were saying? Hey, I was listening to your podcast with your talk with the Visa Chairman. A couple things come to mind. First off, the switch away from

Big Macs is probably a big mistake. And secondly, the Visa Chairman talked about the growth in online betting. What's your take on DraftKings? Thanks. Thank you for the Big Mac advice. I've been on a McRib kick, and I think I'm ready to reevaluate. Now, I'm glad you asked about DraftKings. I spoke recently with its chief executive, Jason Robbins. Hi, Jason. It's Jack Howitt, Barron's. How are you? Good.

How are you? Doing well. Thanks for making a few minutes to speak with us. Happy to do so. Listeners who've known about DraftKings for many years might be fantasy sports fans. Fantasy sports are where players build virtual teams and compete against each other for prizes using the outcome of real sports to supply the statistics. There was a 2006 law in the U.S. that cracked down on some games like internet poker, but opened the door to daily fantasy sports.

Companies popped up to provide play, including what would become the two biggest ones, New York-based FanDuel in 2009 and Boston-based DraftKings in 2012. Both used venture capital, deals with sports leagues, and aggressive marketing to grow. You might also know about DraftKings if you bet directly on real sports online. Welcome back. The Supreme Court ruling for states seeking to allow government-controlled sports betting within its borders. Congress can regulate sports gambling directly, but if it elects not to do so, each state is free to act on its own. In 2018, the U.S. Supreme Court knocked down a law which had banned sports betting in all but a handful of states.

Any state that wishes may now legalize sports betting. 20 have done just that, and more are working on it. The market for legal U.S. sports betting is tiny today, only about a billion dollars a year, but Oppenheimer predicts it will top $14 billion by 2028. That would still be tiny compared with the illegal sports betting market estimated at more than $150 billion. So there's room for fast growth for many years to come. The game plan for DraftKings is to use its estimated 60% market share in US daily fantasy sports to cross sell its online sports betting business. Projections for 2021 have DraftKings revenue jumping 54% to $845 million.

Most of that will come from daily fantasy sports and online sports betting. There's also a small but fast-growing iGaming division for online versions of casino games. The reason it's small is that so far, only a handful of states have legalized casino-type gambling online. DraftKings went public just this year, and in somewhat colorful fashion. DraftKings announcing plans to go public in a merger with a special-purpose acquisition company, Diamond Eagle, and gaming technology companies SB Tech, expected to close in the first half of next year. The deal makes DraftKings the only vertically integrated pure play sports betting and online game.

It and FanDuel had tried to merge but abandoned the idea after the US government objected in 2017. FanDuel ended up being bought out the following year by a sports betting company based in the UK and Ireland. It's called Paddy Power Betfair. DraftKings came public this year by merging with what's called a SPAC, or Special Purpose Acquisition Company. Those are sometimes called blank check companies. They're set up with the goal of waiting for a promising takeover opportunity and then pouncing. The SPAC merger for DraftKings was

announced a year ago and completed this past April. If you had bought shares of the SPAC a year ago before the deal was announced, you'd now be sitting on DraftKings stock worth five times what you put in. Not all SPACs work out like that, but it doesn't take too many like DraftKings for interest in SPACs to take off, and it has. Now DraftKings for interest in SPACs to take off, and it has. Now, DraftKings was recently valued at $20 billion. That's $5 billion more than MGM Resorts International, the big casino owner. I asked Jason how the pandemic has affected his business. He says people have been stuck at home without much to spend their entertainment dollars on,

and that several states recently legalized sports betting. I think that because of that, you had sort of a bunch of different things come together that, you know, there's a lot of excitement in general around the industry, especially in new states that have, you know, people that for the first time are able to legally bet on online sportsbook. And I think when you combine that with people being home and some pent-up demand for sports and maybe having a little bit more discretionary entertainment dollars in their pocket, I think all those things have helped fuel some real growth in the business. Unsurprisingly, Jason thinks new states legalizing sports betting will be an important source of growth. Just to give you perspective, we were in two states with online

sports betting to start NFL season 2019. Now we are in 10. So just in a little over a year's time, it's been 5x the number of states that now we can operate online sports betting in. So those are still growing. Even New Jersey, which is in its third NFL season, is still growing triple digits year over year. I asked whether DraftKings views casinos as friends or rivals. Jason says they're friends and important partners. DraftKings is required to partner with casinos in some states. Jason points to the experience of New Jersey, where online casino gambling has been available for years and sports betting is legal now too, gambling has been available for years, and sports betting is legal now too, and casino revenues there have grown. Lottery revenue too. Jason says that shows the draft king can coexist peacefully

with casinos and lotteries, that a rising tide lifts all boats, as he puts it. One reason states are willing to legalize gambling is that many need the tax revenue. Here's Jason. If you think about it, there's really a few levers that can be pulled in a situation like this one where you have major budget gaps across every state in the nation, pretty much. One is you can raise taxes on your citizens, which is a tough proposition. Secondly, is you can cut key things that people rely on, whether that be education programs, health programs, other things, but cut budget. And then option three is you take our industry, which is volunteering to be taxed, and we'll generate job growth and economic activity even beyond the taxes everywhere we

operate in the states that we're in. We're spending money marketing with the local media affiliates, teams. We're doing events. Well, not now, but we were pre-COVID at local bars and restaurants. So there's really a lot of activity even beyond the tax revenue. What about gambling addiction? Won't the availability of online gambling hurt addicts? And could it take people with a propensity for addiction and push them over the edge? Jason says that to the extent that can happen, it's already happening because the illegal sports betting market today mostly isn't the one from years ago where you call a local bookie over the phone. Today, illegal sports betting is mostly done

online through companies registered in the Caribbean and elsewhere. There's little by way of consumer protections or tax revenue. Companies like DraftKings will include things like self-exclusion tools, limits people can place on themselves. There's lists that go statewide so that if we exclude somebody because we've identified a responsible gaming issue, other operators in the state will do the same. All of that cannot happen in an illegal market. I asked Jason what his ambition is for how big DraftKings can become. He says he thinks it can be a $100 billion company. That's five times its current market value. He says international expansion will be important, and so will getting

into new products as laws allow, like gambling on video games. You know, it's a spectator sport, right? So anything that's a spectator sport should have a fantasy embedding component that can appeal to customers. And it's got such a fast-growing audience. It's got a global audience. It can be done anywhere. So, you know, that's why during the pandemic when sports, traditional sports, I should say, seized, esports, you can play from

your own house. So everybody's been talking about it for a while and organization of how the tournaments operate and things like that is still evolving. But we believe it's going to be a huge category in the fantasy and betting space. And it's more a matter of when than if. Jason likes to compare DraftKings with another company outside of gambling that I'm guessing you've heard of. People laugh a little when I say this, but we aspire to be almost like Amazon in that sense. You know, they started selling books online. And fast forward 20 something years later, and not much you can't buy on Amazon. So, you know, we think of ourselves as sort of a similar thing. We have an account and a wallet that people have with us. They trust us. They trust us to deliver

good experiences. They trust us to deliver good experiences. They trust us to handle their money. And those are things ultimately that we think can lead to future opportunities for expansion. The gambling business has a reputation for reliable profits. And DraftKings is growing its revenue quickly, so you'd think it would be rolling in profits. But in fact, it's not profitable yet. And Wall Street doesn't expect it to be for years. Jason says there's a good reason for that. The reason that's a little tricky is that with each new state that we launch, we have a period of investment and then we turn

profitable. We've usually said that that's about two to three years. So, you know, we still feel pretty good about that. New Jersey, for example, which is about two to three years. So, you know, we still feel pretty good about that. New Jersey, for example, which is about two years and four months in, we think is on track for that two to three year time frame to profitability. So, you know, pretty soon. Jason says the reason DraftKings can't tell investors the year it will become profitable overall is that it can't predict the pace at which new states will legalize different types of gambling. The company trades at 46 times next year's projected revenue. That's an ambitious valuation, even for a fast-growing company providing online services. But nearly two-thirds of analysts who cover the stock recommend buying it.

One more question for Jason. Does he gamble? What's his favorite game? Any tips? That was three questions, but still. Well, certainly there's, based on some of the licenses I have, there's restrictions now in certain places I can't. I can still bet when I go to Vegas.

So, you know, I'll bet small dollars on sports or games in states that I'm allowed to. But, you know, I used to play a lot more. I used to bet more. Jason's favorite betting used to be going with college friends to Las Vegas for basketball's March Madness. That was always a really fun moment every year. And really just, you know, one of my favorite experiences is sitting in the sports book and you got your bracket on one side, you got your bets on the other. And there's just games everywhere. And every moment is exciting. For casino games, Jason says, if you're looking to compete peer to peer, try poker. And if you're looking for a more social game, try craps. With craps and blackjack, he says, you can get pretty close to even odds if you know what you're doing. Okay, but what if the only thing you know for sure about craps is that you're supposed to always

play it in a white tuxedo jacket like Sean Connery in the 1971 James Bond movie, Diamonds Are Forever. Well, here's Jason with his top tip. If you're new to craps, I would tell people to start off, just bet the pass line and then, of course, bet behind the pass line. Behind the pass line is the best bet in the casino. It pays out even money. You know, it's a simple way to start off playing and get a feel for the game. And if you like that, then you can look at the other betting options on the table.

Bet behind the pass line. I'm going to immediately start recommending that to people. And at some point, I'm going to look it up so I know what it means. Thank you, George from Manhattan, Kansas, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone and send the recording in an email to jack.how, that's H-O-U-G-H, at barons.com. Thank you for listening. Meta Lutsov is our producer. You can find her at the Sierra Leone Casino, where the slots are loose and the drinks

are, I'm guessing, plentiful. Right, Meta? Right. I'll be wearing a white tuxedo. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.