I am neutral on DraftKings (NASDAQ:DKNG), as its strong growth rate and bullish Wall Street consensus are offset by its heavy current losses.
DraftKings is an American multi-channel digital fantasy sports and gaming company. The company provides its users with daily fantasy sports and iGaming opportunities, and is also involved in the design and development of casino gaming platform software.
DraftKings has business-to-consumer and business-to-business segments, out of which it generates the most revenue from the business-to-consumer segment in the U.S. (See DKNG stock charts on TipRanks)
Strengths
DraftKings is live with online sports betting in 12 states that represent 25% of the population of the US. The company is also live with iGaming in four states that consist of 10% of the country’s population.
In August, DraftKings signed an agreement with Genius Sports to use its company’s content, sportsbook data, and user engagement solutions. This gives the gaming company access to official data and video feeds from over 170,000 events per year, including NFL products.
The company also has plans to open its own sports bars, and expand its contract with MLB in order to live stream games on DraftKing’s app. In August, the company signed a deal with Tom Brady’s NFT platform, Autograph.
Recent Results
In its latest quarterly results, DraftKings reported an increase of 281% in monthly unique payers on a year-over-year basis. Average revenue per monthly unique payer climbed 26% to $80, and total revenue for Q2 hit $298 million, a jump of 297% year-over-year pro forma.
Moreover, excluding the pro forma effect, the company’s revenue increased 320% on a year-over-year basis. DraftKings’ $298 million revenue in the second quarter was driven by strong engagement in its major product offerings.
The company is also expecting to complete the migration of its proprietary in-house online sports betting technology, once it gets approval from one more state.
Despite all the positives, though, the company was hit by a net loss of $305.5 million in the second quarter, due to heavy operations and marketing expenses.
Valuation Metrics
DraftKings stock does not look particularly cheap here, as it continues to run up heavy losses. Furthermore, despite expectations of 109.4% year-over-year revenue growth in 2021, and 38.7% year-over-year revenue growth in 2022, the company is still expected to be running up heavy losses in 2022.
As a result, any investment right now is based on the assumption that the company will be able to turn profitable at some point in the future.
Wall Street’s Take
From Wall Street analysts, DraftKings earns a Strong Buy analyst consensus, based on 12 Buy ratings, and four Hold ratings assigned in the past three months. Additionally, the average DKNG price target of $72.43 puts the upside potential at 37%.
Summary and Conclusions
DraftKings is enjoying rapid growth, and has very strong support from Wall Street analysts. However, the fact that it continues to run up heavy losses makes it a speculative bet on long-term success.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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