Is DraftKings Stock A Buy? Sports betting is a billion-dollar industry that’s only expected to continue its explosive growth. DraftKings (NASDAQ:DKNG) is an industry-leading betting platform that’s home to around 8 million — and counting —users. In its most recent earnings report, DraftKings doubled its revenue again to $1.296 billion, more than double what it generated the year before.
“DraftKings’ strong fourth-quarter performance exceeded our expectations on the top and bottom line,” said CEO Jason Robins. “We enter 2022 positioned to grow our market share, further optimize our user experience and continue to strengthen our multi-product suite of offerings.”
This kind of growth would have any investor wondering if they should invest in DraftKings to cash in.
SCOTUS Fuels DraftKings Growth
A 2018 Supreme Court ruling struck down the Professional and Amateur Sports Act, which outlawed sports betting in most states. This move paved the way for each state to set its own rules and regulations surrounding sports betting. Since the ruling, many states have moved to legalize sports betting.
DraftKings IPOed as DKNG in 2020 as the well-known fantasy sports platform attempted its parlay into the world of online sports betting. DraftKings and its main rival FanDuel account for about 80% of all American sports betting. Other competitors include ESPN (Disney), MGM, and Bally’s.
Long before the legalization of sports betting across the U.S. and its IPO, the company, established in 2012, was run out of one of the founder’s homes. Its first product was a baseball competition that was launched to coincide with MLB’s 2012 opening day. In 2013, MLB invested an undisclosed amount in the company, marking the first American professional sports organization to invest in daily fantasy sports.
By 2014, DraftKings announced $41 million in funding from a variety of investors and reached a two-year deal to become the official daily fantasy sports service of the NHL.
In 2016, DraftKings and competitor FanDuel announced plans to merge. But, in 2017, the Federal Trade Commission announced an injunction to block the merger as it would give the combined company a 90% stake in the market, something the FTC considered a monopoly.
Also, in 2017, DraftKings and FanDuel each paid $1.3 million for a settlement with the Massachusetts Attorney General’s office over allegations of unfair and deceptive practices.
The Losses Are Mounting
Despite explosive revenue growth, DraftKings remains unprofitable, and its efforts to shrink its losses while growing revenue has been unsuccessful so far.
Even as digital sports betting continues to increase in popularity across the county, DraftKings still remains quarters away from profitability, which is a big concern for investors. As a result, DraftKings is down nearly 60% in the past year.
While its revenues have grown to an impressive $1.3 billion, its net losses are also ballooning — to $1.6 billion. A loss of over 100% of revenue on the bottom line is alarming to investors.
DraftKings marketing costs play a leading role in the blame for its losses.
In 2021, the company reported $981.5 million worth of marketing expenses, more than double the reported $495.1 million from the year prior. As new states legalize mobile sports betting and gaming, DraftKings spends aggressively on sales and marketing to let people know they now have access to its services.
DraftKings current presence in 17 states has advantages and disadvantages. On the bright side, it signifies the potential for continued growth. But, on the downside, it means the company will likely continue reporting losses on its bottom line as it expands to new markets and continues to spend on marketing and sales in emerging markets.
Still, analysts are forecasting 53% revenue growth this year, but overall growth estimates are anticipated to drop by 7% over the next five years.
In recent months, DKNG’s trading price has plunged, worsening a downturn that’s lasted for more than a year. In March, DraftKing’s stock was trading near its recent 52-week low of $16.56, and the stock is down more than 43% since the beginning of 2022, a 72.1% drop over the past year.
In February 2022, the company disclosed its CEO had taken a pay cut, with 2021 compensation at $14 million, down from $236 million in 2020.
In January 2022, the company launched mobile sports betting in New York and Louisiana, increasing its operations to 17 states. The company said this move could help them turn a profit in Q4 if they step back from launching in more steps later this year.
Is DraftKings a Buy?
Even though DraftKings may appear as a buy upon first glance, when you dig a bit deeper, it’s clear to see that it’s actually a sell — unless it starts producing profits ASAP.
Until it can start generating profits, it’s a sell, especially because DraftKings is losing money faster and faster each year, a business model that is just not sustainable from a cash burn perspective.
Of course, DraftKings CEO has a different take, tweeting the following:
“If you sold #DKNG today, just be aware that my team and I are on a mission to make you regret that decision more than any other decision you’ve ever made in your life.”
DraftKings is expected to release its Q1 2022 earnings report on May 6, with an accompanying earnings call. So, any investor still keen on buying into DKNGS should at least wait for the earnings call to become more informed about recent activity and get a better idea of what the future holds for the company struggling to turn a profit.
Based on a discounted cash flow forecast analysis, the fair market value for DKNG stock is $18.53 per share, above which it is overvalued. For the conservative-minded investor, a wait-and-see approach is best at this time. DraftKings is an attractive bet for the long-term oriented speculative investor, however.
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