If You Own DraftKings Stock, Expect to Sweat It out For Now
Back last September, DraftKings (NASDAQ:DKNG) stock was viewed as a “can’t miss” wager among investors.
Going into the football season, many “laid the points” with DKNG, buying into it at its highs with the expectation that this winning sports betting stock would stay a winner.
Since then, not only has this favorite failed to cover, but it also has been losing the game outright. Falling from $63.67 per share, to around $26.31 per share, it’s down nearly 59%. Yes, this isn’t entirely the fault of this leading sportsbook operator.
Market related factors have played a big role in its declines. Still, there are a few company-specific factors that have partially driven its recent declines. These same issues cloud the chances it makes a comeback over the next twelve months. Even if you believe that high revenue growth will save the day, expect to continue sweating it out with your investment.
DKNG Stock and Its Big Tumble
As I mentioned above, things not in DraftKings’ control have played a big role in its big tumble in price. The market realized it put the cart before the horse when it came to sportsbook and i-gaming stocks.
That’s why peers such as Caesars (NASDAQ:CZR), MGM Resorts (NYSE:MGM), and Penn National (NASDAQ:PENN), have seen big drops as well. The Federal Reserve’s rate hike plans have made the situation worse. With rates going up, valuations for richly-priced growth stocks are coming down.
Yet both these factors aren’t the sole reason DKNG stock has been a bad bet for investors lately. Underwhelming results (last reported in November) have been a factor as well.
For the quarter ending Sept. 30, the company reported $213 million in revenue, and losses of $1.35 per share. This top line number, while up big from the prior year’s quarter ($133 million), came in below sell-side projections ($236.9 million). Analysts also expected narrower losses (98 cents per share).
Management chalked this up to a lower-than-expected “hold,” (percentage of wagers kept by the house), as the result of NFL game outcomes. But heavy competition, and the resultant high promotional costs that come with staying ahead of it, was a likely culprit as well.
This issue in particular is what makes it questionable whether the company can deliver better results when it next reports.
DraftKings Has a Lot to Prove
In 2020 and through most of 2021, DKNG stock had a lot on its side. With its main business rapidly growing, as more U.S. states legalized sportsbooks, a high projected total addressable market convinced investors it was a buy at any price. The market’s enthusiasm for “growth at any price” plays added to this.
That’s why DraftKings was able to get to such a frothy valuation. It’s also why, despite its big drop, the stock still trades at a high price-to-sales multiple (8.4x).
However, to avoid further multiple compression, it’ll need to accomplish two things. First, it needs to knock the socks off of Wall Street when it comes to revenue growth. No more slight revenue misses. It also needs to demonstrate that it will hit profitability sooner than current expectations.
Unfortunately, achieving either one, much less both, could be a challenge. With high competition between it, the names listed above plus FanDuel parent Flutter Entertainment (OTCMKTS:PDYPY), meeting/beating growth estimates may be easier said than done.
Granted, with more states legalizing sports betting (most recently, New York), an expanding market may make up for this. However, with New York now allowing sportsbooks, there are only a few more states that have yet to legalize sports betting. The key ones are California, Florida, and Texas.
In the first two states, California and Florida, multiple stakeholders (state governments, Native American tribes, commercial gaming) are still trying to iron it all out.
Texas, with its legislature only meeting during odd-numbered years, likely won’t legalize until at least 2023. As for the second thing, a road to profitability? Still having to spend heavily on promos to attract and retain players, it’ll be years until DraftKings gets out of the red. Analysts over at UBS believe it won’t be profitable until 2024.
Even as an Underdog, It’s a Questionable Wager
No longer a heavy favorite, many may see now as the time to go against the grain, and place a bet on DraftKings. Yet while you can argue that the U.S. sports betting megatrend has only started to warm up, I wouldn’t expect this one-time big winner to get back to winning immediately.
That said, legalization in medium and small-sized states could make up for California, Florida and Texas still being offline. Its big move into i-gaming (online casinos) could help improve its performance as well.
A 2022 comeback is possible for DKNG stock. Just keep in mind it’s not for certain. In the meantime, you can expect shares to stay volatile.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
