Despite Its Improved Outlook, DraftKings Remains Unattractive
Driven by a few factors, the outlook of DraftKings (NASDAQ:DKNG) stock has definitely improved.
Nonetheless, I’m still worried about the company’s bottom line, and I think that the stock’s current valuation likely reflects the company’s long-term potential.
One factor that has made DKNG stock a better bet is the declining impact of Covid-19 on sports. As a fairly big fan of Major League Baseball and a player of NFL fantasy football this season, I can attest that most professional athletes are currently vaccinated, making teams much less likely to suffer mass outbreaks.
In fact, I can’t remember the last time that a team was forced to forfeit a game or play without a significant number of its stars due to the pandemic. As a result, I no longer believe that the pandemic presents a meaningful risk to DraftKings or its shares.
Secondly, the growth of sports betting has been more rapid than others and I had expected. Using, “pinging data,” Geocomply found that sports betting volume jumped 123% during the week of the first NFL regular season game, versus the same period a year earlier.
And as of the end of July, U.S. sports betting in 2021 had soared 435% from a year ago to $2.12 billion, Seeking Alpha quoted Eilers & Krejcik Gaming as reporting. In June, the latter firm predicted that U.S. sports betting for all of 2021 would come in at only $1.24 billion.
Strengthening Marketing Activities
DraftKings appears to be spending a great deal of money on partnerships and ads. Consequently, I’m less worried about it becoming an also-ran to competitors that have strong partners, as well as their own brick-and-mortar casinos that they can use to promote their sports betting operations.
Two good examples of DraftKings’ stepped-up marketing efforts are its partnerships with the NFL and a well-known online sports news website, Bleacher Report. In late April, DraftKings bought the rights to a popular sports podcast, and it is reportedly on the hunt for more partnership deals and acquisitions. Finally, along with two of its rivals, FanDuel and Caesars (NASDAQ:CZR), DraftKings is spending a great deal of money on advertising.
Also encouragingly and indicating that the company’s marketing activities are having a positive impact, Wells Fargo recently predicted that DraftKings would obtain 24% the $18.8 billion projected sports betting and iGaming market by 2025. That includes $11.3 billion for U.S. sports betting and $7.5 billion for iGaming, Seeking Alpha reported.
There Are Still Reasons to Be Cautious
Although DraftKings’ top line soared to nearly $300 million, from almost $71 million during the same period a year earlier, its loss from operations roughly doubled to $321.55 million, versus $160.44 million during the year-ago period. In light of those numbers, I remain very concerned about the company’s profitability.
And despite the fact that I’m more upbeat on DraftKings’ marketing strategy, while the company is obviously growing rapidly, I’m still concerned about its ability to obtain enough users to approach profitability. That’s particularly true because of the many tough competitors in the sector.
In addition to FanDuel and Caesars, DraftKings is also facing, among others, Penn National (NASDAQ:PENN) and MGM (NYSE:MGM) subsidiary, BetMGM. And as I pointed out in my last column on DKNG stock, Eilers & Krejcik reported that, DraftKings was not the market share leader in any large state over the most recent three-month period.
Moreover, despite these obstacles, the valuation of DKNG stock remains quite elevated. Specifically, its forward price-sales ratio, based on analysts’ average 2022 sales estimate, is over 13. Given the stock’s very high valuation, I believe that much if not all of DraftKings’ potential for the next few years is already priced into the shares.
The Bottom Line on DKNG Stock
I’m much more upbeat on DraftKings’ outlook than when I wrote my last column on the stock. However, given my continuing concerns about its profitability, competition, and valuation, I do not expect the shares to outperform the market over the next few years.
Moreover, I think there are many much more attractive stocks available for growth investors. Consequently, I continue to urge investors to sell DKNG stock.
On the date of publication, Larry Ramer held a long position in MGM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Ford, Exxon, and Snap. You can reach him on StockTwits at @larryramer.
