In its latest earnings release, DraftKings Inc. (DKNG) raised its revenue guidance for 2023 to $2.85-$3.05 billion from $2.8-$3 billion it announced in November. This followed soon after it became the most downloaded sportsbook app in the U.S. on Super Bowl Sunday while benefiting from increased sales from newly legal betting.
However, DKNG’s financial statements suggest that its top-line growth may not translate to improvement in its bottom-line performance. I think the stock is best avoided now for reasons discussed throughout this article.
DKNG operates as a digital sports entertainment and gaming company. The company offers multi-channel sports betting and gaming technologies, powering sports and gaming entertainment for operators across 17 countries.
Despite the optimistic management guidance, DKNG’s stock has lost 14% over the past month to close the last trading session at $18.31.
Here are the factors that could influence DKNG’s performance in the months ahead.
Weak Financials
During the last fiscal year (ended December 31, 2022), although DKNG’s revenue increased 72.9% year-over-year to $2.24 billion, it incurred a loss from operations to the tune of $1.51 billion, which is comparable to the previous year. The company’s adjusted EBITDA loss for the year widened by 6.8% year-over-year to $721.78 million.
As a result, DKNG’s net loss for the fiscal attributable to common stockholders came in at $1.38 billion or $3.16 per share.
Moreover, DKNG’s total assets and liabilities stood at $4.04 billion and $2.72 billion as of December 31, 2022, compared to $4.07 billion and $2.39 billion, respectively, at the end of the previous fiscal year.
Inefficient Capital Utilization
DKNG’s trailing-12-month gross profit margin of 33.75% is 3.6% lower than the industry average of 34.99%. Similarly, its negative trailing-12-month EBITDA and net income margins of 59.15% and 61.50% stand out in stark contrast to the industry averages of 11.44% and 4.56%, respectively.
Moreover, DKNG’s negative trailing-12-month ROCE, ROTC, and ROTA compare unfavorably to the respective industry averages of 11.05%, 6.30%, and 3.84%.
Stretched Valuation
Despite the lack of profitability, DKNG’s stock is trading at a valuation higher than its peers, which translates to higher downside risk.
DKNG’s forward EV/Sales multiple of 2.77 is 143.2% above the industry average of 1.4. Similarly, its forward Price/Sales and Price/Book multiples of 2.77 and 10.28 also compare unfavorably to the respective industry averages of 0.87 and 2.52.
POWR Ratings Reflect Weakness
DKNG has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. DKNG has an F grade for Stability, justified by its 24-month beta of 2.54 and the spread between its 52-week high and 52-week low prices of $21.62 and $9.77, respectively.
DKNG has a D grade for Value and Quality, in sync with its stretched valuation and unimpressive profitability. Unsurprisingly, it is ranked penultimate of 30 stocks in the Entertainment - Casinos/Gambling industry.
Beyond what has been discussed above, additional ratings for the Growth, Sentiment, and Momentum of DKNG can be found here.
Bottom Line
On February 1, it was reported that DKNG would be cutting 140 jobs, about 3.5% of its workforce, to improve the efficiency of its operations. Affected segments include engineering and talent acquisition. The company also said roles are being eliminated in the U.S. and internationally, primarily in Europe, the Middle East, and Africa.
Regardless of such reorganization and cost optimization measures, analysts expect DKNG to keep reporting net losses until fiscal 2025.
Hence, in view of its weak fundamentals and a long and uncertain path to profitability, it may be wise to pass on this stock for the time being.
Stocks to Consider Instead of DraftKings Inc. (DKNG)
Unfortunately, the odds of DraftKings outperforming in the weeks and months ahead seem greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Entertainment - Casinos/Gambling industry instead:
Boyd Gaming Corporation (BYD)
PENN Entertainment, Inc. (PENN)
Accel Entertainment, Inc. (ACEL)
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DKNG shares were trading at $18.07 per share on Wednesday morning, down $0.24 (-1.34%). Year-to-date, DKNG has gained 58.65%, versus a 4.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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