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Motley Fool Issues Rare “All In” Buy Alert
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Down 46% so far in 2022, DraftKings (DKNG 2.80%) stock has suffered an even worse slump than the S&P 500, which has fallen 17%. And even after its slide, the stock isn’t particularly cheap. While sales are growing at a massive clip, management expects a slowdown. Meanwhile, profitability looks to be nowhere in sight. Is there any hope for DraftKings? Let’s find out.
DraftKings operates a sports betting and online gambling platform. Its stock made a big splash when it hit public markets through a SPAC merger in early 2020. DraftKings arrived just in time to ride the stay-at-home wave during the COVID-19 pandemic, and saw its shares soar to an all-time high of $72 by March 2021 (a gain of around 260%).
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Now trading for just $15, DraftKings has fallen substantially from its highs. And this has a lot to do with its disappointing financial performance. Third-quarter earnings were a mixed bag. Revenue skyrocketed by 136% to $501.9 million amid strong consumer acquisition and the continued rollout of its platform across the U.S. But while operating losses narrowed from $546.5 million to $455 million, this is still extremely high at roughly 90% of sales.
DraftKings spends a huge amount of money on sales and marketing to grow its revenue, and this raises questions about the company’s pathway to profitability. Efforts to cut back on this spending could cede market share to well-funded rivals like MGM Resorts International‘s BetMGM, which is subsidized by one of the world’s largest brick-and-mortar casino brands. If that weren’t bad enough, DraftKings’ revenue growth is slowing.
DraftKings’ weak margins wouldn’t be such a big deal if the company could maintain the triple-digit growth rate it posted in the third quarter. But this looks unlikely. The company expects revenue of just $2.8 billion to $3 billion in 2023. At the midpoint, this would represent year-over-year growth of 33% — a sharp deceleration from the 67% to 69% expected for 2022. These projections include jurisdictions where DraftKings already operates and those where it expects to launch.
With its platform live in 18 states (representing 37% of the U.S. population), DraftKings still has room to grow in the U.S. by expanding its geographic footprint. But this isn’t always a cut-and-dry thing. Sports betting remains a highly regulated industry, and ballot initiatives to legalize the pastime don’t always go as planned. In November, California voters rejected Proposition 27, a wide-ranging bill to legalize online sports betting, among other gambling activities.
While DraftKings CEO Jason Robins believes legalization efforts could pass in 2024, the setback highlights the unpredictability of an expansion strategy that depends, in large part, on politics.
While DraftKings stock is significantly cheaper than its previous highs, it trades with a growth stock premium. With a price-to-sales multiple of 3.5, shares are valued significantly higher than the S&P 500 average of 2.4. While the company boasts an impressive growth rate, a topline slowdown and massive losses should be cause for concern. While DraftKings could pull out of this tough situation over the long-term, investors may want to wait for legalization progress and sustainable margin improvements before taking a position in the stock.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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