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‘This happens in every tech sector.’ Online sports betting giant DraftKings has entered a perilous phase

Aborted merger talks and increased competition have sent the Boston company’s stock down.

Jason Robins, chief executive officer and cofounder of DraftKings Inc.Marco Bello/Bloomberg/file

Like a poker player drawing nothing but rags, DraftKings chief executive Jason Robins has faced a run of bad luck this year that’s cut his company’s stock price in half since March.

It’s a rude shock for the CEO, who likes to throw out jaw-dropping goals for the nine-year-old Boston company. After comparing DraftKings a few times to e-commerce titan Amazon, Robins has said his online sports-betting company — with a current stock market value of $11.5 billion — aims to be worth $1 trillion in 10 years.

Everything was on track for most of 2020 and the first part of 2021. The company had expanded smoothly from its start in daily fantasy sports games with cash rewards to standard sports betting and, most recently, to online casino games.

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But it’s been largely downhill since then, and now Robins and DraftKings — one of the Boston tech scene’s notable success stories — face the most challenging period of the business. Spending to acquire customers in a fiercely competitive market is generating huge losses, securities regulators are investigating fraud accusations, and even a streak of football favorites winning has gone against the company.

The emerging market for online betting has entered a typical, if perilous, phase. Early euphoria about potential riches created inflated expectations that now have given way to disillusionment, said Josh Walker, cofounder and president at the Sports Innovation Lab in Cambridge.

“This happens in every tech sector,” he said.

And investors haven’t punished just DraftKings. Its rival Penn National Gaming’s stock is off 60 percent since its March high and Irish competitor Flutter Entertainment, which owns FanDuel, has fallen 41 percent.

For a while, DraftKings seemed to be riding out COVID-19 just fine. Once live sports resumed, more people sought online diversions, bolstering the number of people using the company’s mobile-betting apps and websites to 1.5 million a month by the end of 2020. And states including Michigan and Virginia (though still not Massachusetts) legalized online betting, continuing the trend that started when the Supreme Court threw out a federal ban in 2018. After a strong year, the company’s 2020 revenue jumped 49 percent to $644 million.

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So in early March 2021, Robins laid out DraftKings’ strategy to dominate the future market of online gambling. The company could grow to 10 times more revenue and almost $2 billion of positive cash flow once sports betting was legal for two-thirds of US and Canadian residents and one-third for online casino games, Robins said at a virtual event. (He carefully didn’t predict when states with that many people would allow online gambling.)

DraftKings’ stock shot up for the next few weeks, peaking at $74.38 on March 22 and valuing the company at more than $30 billion.

Not bad for three cofounders who previously worked at a printing and marketing firm, in a town often known for losing out to the West Coast in consumer tech.

Robins, who grew up in the Miami area and went to Duke University, originally came to Boston with Capital One and was working at Vistaprint with Matthew Kalish and Paul Liberman when the three fantasy sports fanatics hatched the idea for DraftKings almost a decade ago. They got to work in a spare bedroom in Liberman’s Watertown apartment and built what has become one of the two largest players in online wagering.

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In an interview with the Globe last month, Robins picked tech titan Apple as a role model for his company.

“Apple is a great example of ... great focus on product, great focus on the customer,” Robins said in a sit-down at the company’s cavernous, quiet, and largely empty office in the Back Bay.

“It’s about serving the customer in a way that’s superior to other places,” Robins said. “That’s how you grow a huge customer base. ... It’s how you drive loyalty. It’s how you build a brand. And those are the most valuable things a company can create.”

But Robins and his team are now dealing with a series of setbacks.

The first major blow came in June, when Hindenburg Research, a Wall Street firm known for betting against stocks, said it shorted DraftKings stock and accused the company of acquiring a Bulgarian gaming software company that flouted gambling restrictions in Asia. In August came news that the Securities and Exchange Commission was investigating. DraftKings said it fully vetted the acquisition and the SEC probe “does not suggest any wrongdoing.” (Famed short-seller Jim Chanos piled on last week, saying he was betting against DraftKings.)

SEC investigations typically take months and the penalty for any violations found can be severe. Electric truck-maker Nikola, an earlier Hindenburg target, will pay $125 million to settle an SEC complaint.

The next miscue happened in September, when a securities filing from British gambling concern Entain, which runs online services and owns chains of betting parlors, revealed DraftKings’ interest in a $22 billion takeover. Analysts were puzzled how the US company could set its sights on a more valuable rival and had trouble understanding why DraftKings wanted to own so many small retail locations in Europe. After a month of rumors and uncertainty, DraftKings walked away.

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Analysts speculated that the acquisition might have been too costly or too complicated, given that Entain has a US online gaming joint venture with MGM, a DraftKings rival.

DraftKings plans to expand globally eventually, Robins explained to the Globe, which made Entain a potentially intriguing merger target.

“I wish it were easy enough to say I want to do that in 2026 and there’s going to be exactly the right thing available at exactly the right time,” he said. “But it doesn’t work out that way. So you have to look at different things.”

Robins said that as DraftKings began holding internal planning meetings for next year, in-house expansion options looked more appealing than a merger. “I remember walking out of a session we had and thinking, I just feel way more excited about the things we just discussed that we’re going to build next year than I do about doing this deal anymore,” he said. “And that’s when I knew it was the right time to call it off.”

A bigger challenge may be that the effort to gain more high-rollers isn’t really the future, according to Walker at Sports Innovation Lab. The ultimate pot is attracting the billions of people who don’t already gamble into casual wagering and “social gaming,” he said. DraftKings “has very savvy technology guys at the core ... but I don’t think anybody’s cracked the code yet.”

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For now, DraftKings and rivals like FanDuel and MGM are spending billions to attract hardcore gamblers with TV ads, mobile ads, or any kind of ads they can buy, not to mention exclusive deals with teams. DraftKings spent $703 million in the first nine months of the year on marketing.

Robins didn’t want to detail future products, but the company is already selling popular crypto items known as non-fungible tokens, or NFTs. And in filings, the company has said it is working on wagering and contests for eSports video games and simulated NASCAR races.

The latest blow came in DraftKings’ third-quarter earnings report last month, with revenue of $213 million, which was lower than expected, and a loss of $314 million, which was larger than expected.

A big problem in the quarter was bad luck. In the NFL, a lack of upsets helped gamblers who had strung together bets on multiple games win more frequently since they tended to favor the favorites. The extra wins cost DraftKings about $25 million.

And yet the company’s opportunity ahead is still huge.

DraftKings’ success hinges on how many significant players will be left standing in online betting once most states legalize. Robins sees the market ending up like other consumer-tech areas, split between two or three huge players (think Apple and Google in phones, or Uber and Lyft in ride-hailing).

“Being able to build a meaningful presence state by state isn’t easy and there’s only a handful of companies that will be able to keep up with that pace,” Robins said. While there are more than two-dozen online betting services in some states, for most “either they’ll get acquired or throw in the towel or fade,” he added.

But analyst Edward Engel at Roth Capital Partners in New York said that major casino owners such as Caesars, MGM, Wynn, and Penn National Gaming could easily become bigger online once the market matures.

“Shareholders aren’t going to let DraftKings lose hundreds of millions a quarter indefinitely,” Engel said. “Eventually they will have to pull back, and the big thing people are missing is that these brick-and-mortar casino operators with their online apps aren’t going anywhere.”


Aaron Pressman can be reached at aaron.pressman@globe.com. Follow him on Twitter @ampressman.