Is DraftKings a Buy Sell or Hold?

DraftKings (NASDAQ:DKNG) is one of the companies benefiting from the boom in the American gambling market as states have legalized online betting.

The stock has already risen by more than 45% in the last year, delivering strong returns for longtime shareholders but is it still poised for future growth? 

Competitive Positioning in a Growing Market

DraftKings is currently one of the two major online gaming platforms in the United States, the other being FanDuel.

The two companies have jockeyed for leading position in the market over the past year, with DraftKings briefly taking the lead late in 2023 only for FanDuel to slightly surpass the company earlier this year. At the moment, FanDuel is estimated to have a 35% market share, compared to DraftKings’ 32%.

In essence, DraftKings and FanDuel represent a duopoly in the online American betting market. Fortunately for both of these companies, that market is growing very quickly. American online sports betting in 2023 produced record revenue of $11 billion, up more than 40% from the previous year.

DraftKings’ position at the heart of the growing online betting industry has allowed it to produce exceptional revenue growth. In Q1, for example, revenue grew 53% to reach $1.2 billion. As a result, management upgraded the firm’s guidance for the full year to $4.9 billion.

Though earnings remained negative at $0.30 per share, this was less than half the $0.87 loss per share DraftKings reported in the year-ago quarter.

DraftKings is also benefiting from the effects of larger scale on customer acquisition costs. As the company gained ground over the last year, its cost of customer acquisition fell by about 40%.

This lower price to bring new customers to the platform will be critical going forward, as it presents the opportunity for DraftKings to grow its user base and maximize user value more efficiently from a cost perspective.

Speaking of per-user value, DraftKings also saw strong growth in its spending per customer. The revenue attributed to each of the company’s monthly unique payers rose 25%, while the total number of payers increased by 23%, highlighting a strong trend of growth in both the company’s user base and the amount of revenue its existing users are contributing.

Ongoing Losses and High Valuation

On the negative side, DraftKings is still losing money at a relatively rapid pace. In the trailing 12-month period, the company reported a net loss of a little over $800 million on revenues of $3.7 billion. Though Q1’s earnings were a substantial improvement over the year-ago period, DraftKings still has a ways to go before it will post a net profit.

DraftKings’ valuation could also raise eyebrows among value investors. The stock is priced at 8.7x trailing 12-month sales due to the gains of the past year, a level that will require sustained high revenue growth.

It’s also notable that this ratio has been rising steadily for the past couple of years, indicating that the stock is getting progressively more expensive.

This makes a degree of sense given the fast pace of revenue growth and pullback on losses, but the higher multiples may very well leave the stock trading without a significant margin of safety.

In the short term, inflation also presents a challenge to DraftKings’ growth story. Up to now, online betting has been surprisingly resilient to inflationary pressures.

Should inflation rates continue to put pressure on consumers, they will have less available capital to put toward sports betting. This situation likely wouldn’t be a permanent problem for the industry, but it could slightly delay profitability for companies like DraftKings.

Where Does DraftKings Go From Here?

While DraftKings has its problems, analysts are more or less optimistic about it. The median target price over the coming year for the stock is $52.11, suggesting an upside of more than 40% compared to the most recent price.

We can also expect to see more revenue growth from DraftKings over the next year that could help to make some sense of its valuation. Analysts expect forward revenue growth of about 38.4% from the company. If achieved, this would likely send the stock higher and keep investor returns coming over the next 12 months.

Another critical tailwind for DraftKings is its gradual approach toward its breakeven point. The company is expected to post a loss again in 2024 before moving toward a projected profit of around $270 million in 2025. Though modest compared to the company’s sales, a positive net income would likely bolster the stock. This is especially true if revenue growth continues at a rapid enough pace to result in a sustained period of earnings growth.

On the downside of the outlook, though, is the fact that states are looking at raising taxes on gambling. Illinois, for instance, has proposed a 40% tax on online gambling revenues. This is unusually draconian but could serve as a model for other states hoping to extract tax receipts from the betting industry.

If high taxes on gambling revenues do become widespread, companies like DraftKings will face a real challenge delivering after-tax profits.

Is DraftKings a Buy Sell or Hold?

DraftKings remains a Hold according to analysts who have a consensus price target of $52.11.

All told, DraftKings’ positives seem to outweigh its negatives. As a major player in a fast-growing industry, the company is in a strong position for growth.

Though Fanduel remains a major rival, it seems unlikely that DraftKings will lose its competitive position anytime soon. As such, these two companies could capture many of the gains that are to be had as America continues to warm up to online betting.

Taking all of this into account, DKNG appears to be a reasonable long-term buy for investors with a medium to high level of risk tolerance.

While investors may have to hold the stock for several years to see the best returns as the company eventually becomes profitable, DraftKings has enough going for it to make it potentially worth both the time and risk.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.