Is DraftKings Stock Overvalued?

Draftkings Inc (NASDAQ:DKNG) made fantasy sports not only cool but popular, and it’s truly a king in its niche of sports betting.

The market was only legal in Nevada until a 2018 Supreme Court ruling that opened the floodgates and coincided with the DraftKings IPO.

Commercial gaming is a nearly $50 billion annual industry, and over $900 million was earned on the $13 billion Americans wagered on sports in 2019 alone.

Of course, not all that money goes to DraftKings – it has competition in the form of companies like FanDuel, PlayON, and even the traditional casinos in cities like Las Vegas, Reno, and Atlantic City.

Gambling also joins industries like vaping, cannabis, alcohol, sex, and even cryptocurrency as vice industries that carry a stigma in some localities. That leads some analysts to be bearish about its over-$20 billion market cap.

Let’s dive into DraftKings as a company, product, and revenue generating machine to determine if its balance sheets justify its market valuation.

Why DraftKings Stock Went Up

Although it became a known brand in a relatively short time, what really jumpstarted the interest in DKNG as an investment was the co-sign of Michael Jordan.

This legendary NBA player, coach, owners, and spokesperson is the model of how modern athletes form their careers.

And both Jordan and his late father are avid gamblers, so having the man himself as a special adviser to the board of directors is a win that will inevitably lead to more integration within the professional leagues.

Professional sports took a major hit with the coronavirus, and everything from WrestleMania to the NBA Finals took place in bubbles far removed from the massive crowds they usually reach.

Of course, this also increased at-home viewership, as it got harder to attend live events. DraftKings easily overcame the initial coronavirus hit, and the addition of a well-known name like MJ to the fray gave the company’s leadership confidence to continue pursuing investments.*

The early-September announcement took DraftKings from the $30-40 range to the $60 range with a market cap over $20 billion.

By October 5, the company announced a public offering of 32 million shares of Class A common stock, including 16 million each from DraftKings and its shareholders. This offering will certainly affect the company’s financials, which we’ll examine next.

DraftKings Financials: Growth At A Cost

DraftKings reported a loss of almost 50 percent in 2019, based on $146.6 million in losses on $323.4 million in sales.

It also posted a loss in 2018 of $76.8 million on sales of $226.3 million. This isn’t unusual, as companies like Uber and Tesla reported losses for years in the face of high company valuations.

And the company’s latest stock offering is meant to continue pulling in cash it’ll need to maintain operations and expand.

Even though you can buy DKNG shares, co-founder and Chief Executive Jason Robins has the lion’s share of voting rights through his Class B shares. Each Class B share grants him 10 votes, compared to 1 for a public Class A share.

The company ended 2019 with 684,000 monthly players, but it still posted a net loss of $68.7 million in the first quarter of 2020.

The userbase continues growing, but it’s far short of the actual fan bases for each league.

The NFL boasts 160 million fans, according to an ESPN poll. NBA teams have a total Facebook following of 38.54 million fans. An estimated 167.9 million people consider themselves MLB fans.

Is DraftKings Valuation Too High?

The DraftKings IPO occurred through a blank-check company merger in the wake of the removal of the Professional Amateur Sports Protection Act.

This allowed states to make their own decisions on legalized online gambling. While the article focuses on fantasy sports and sports betting, the company also generates revenue through online casino gambling. This puts it on the frontline of a lot of regulation and could stunt the company’s growth.

It also accounts for only a small portion of the market estimated to hit $20 billion soon. The competition can easily move in, which leaves some analysts wondering whether the company can sustain its market value. Let’s explore what will make the stock drop.

Will DraftKings Stock Drop?

The temporary problems with sports leagues shutting down in 2020 only continued to fuel fantasy sports. With that said, it’s still a limited niche.

Fantasy players are 81 percent male, and sports betters are 80 percent male. Half of both customer pools are between the ages of 18-35, and just under half makes over $75,000, making them better off financially than the national average.

With only 19 percent of American adults over the age of 18 participating, there’s a need for the company to continue drawing revenue from its limited base.

It also faces increased localized legislation, much like the cannabis industry, where laws drastically vary from state to state. This leaves analysts split about the company’s growth potential as the country faces a pending recession.

Is DraftKings Stock Overvalued? The Bottom Line

DraftKings is more than just fantasy sports – it also facilitates online sports betting and casino gambling. This market, coupled with the non-traditional way it went public, leaves some analysts scratching their heads. It has been operating at a loss for several years, and that trend looks to continue for the foreseeable future.

Still, it’s drawing headlines by releasing stocks in phases, with the most recent offering occurring after Michael Jordan got involved with the company.

Still, it’s unclear if the company will be able to continue growing and drawing value for its investors. The shares don’t allow for meaningful voting rights, and there’s heavy competition in a limited niche. 

A discounted cash flow forecast places the intrinsic value of the company’s shares at $51 per share. Above that level the company is theoretically overvalued.

Keeping its largely male audience satisfied through economic turbulence is the key to DraftKings profitability, but it may be creating its own bubble in an effort to generate liquidity from investment capital.

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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.