DraftKings Stock Looks to Be Overvalued and Outcompeted

After a number of data points emerged that are negative for DraftKings (NASDAQ:DKNG) stock, I remain bearish on the shares.

Draft Kings app

DraftKings’ Q1 bottom line was quite worrisome, while its valuation is sky-high.

In several past columns, my thesis has been that the U.S. sports gambling market would be hyper-competitive.

Validating that thesis is a report by Eilers & Krejcik Gaming found that DraftKings was the top sports betting company in only three states over a recent three-month period: Indiana, Iowa, and New Hampshire.

Sports betting has been legalized in 31 states.

Additionally, the three states in which DraftKings is the leading operator have rather sparse populations.

In 2019, the populations of Indiana, Iowa and New Hampshire were just 6.7 million,  3.15 million, and 1.36 million, respectively, according to Google.

Conversely, Flutter Entertainment (OTC:PDYPF) led in Illinois, Pennsylvania, New Jersey, and Virginia, whose 2019 populations are: 12.67 million, 12.8 million, 8.88 million and 8.54 million, respectively.

MGM’s (NYSE:MGM) BetMGM  led in Michigan, Colorado and Tennessee, whose 2019 populations were 10 million, 5.76 million and 6.83 million, respectively.

I draw two conclusions from that data. First, the U.S. sports betting market is indeed hyper-competitive. Second, DraftKings has failed to capture the top spot in any large state.

That’s despite the fact that, as of the end of the first quarter, DraftKings offered online sports betting in 12 states that collectively represent 25% of the U.S. population, according to the company.

It also comes despite the fact that the company spent $228.7 million,  or about 73% of its entire revenue, on sales and marketing in Q1.

A Closer Look at DKNG Stock

On the macro level, meanwhile, although sports betting is now legal for over 50% of the  U.S. population, sports betting sales came in at just $1.24 billion this year to date Seeking Alpha quoted Eilers & Krejcik as saying.

Assuming that’s for Q1 (SeekingAlpha doesn’t say what time period the report covers), that’s a full-year run rate of about $5 billion.

If DraftKing’s market share comes in at 20% (which I think is fairly generous, given the company’s failure to lead the pack in any large state) that’s an annual top line of $1 billion –based on Eilers & Krejcik apparent estimate —  versus the $21 billion current market capitalization of DKNG stock.

Given the huge competition that the company is obviously facing and the gigantic amount it is spending on sales and marketing, that’s a gargantuan valuation.

Eilers & Krejcik also predicts that the U.S. sports betting market could reach $19 billion if, at some unspecified future point, all 50 states legalize sports betting.

Assuming that DraftKings could maintain a 20% market share at that point, its stock would, according to my calculations using the firm’s estimate, now be trading at 5.5 times its future top line.

That’s still a very unfavorable valuation, however, since that scenario could easily take four years to materialize. Meanwhile, DraftKing’s marketing spending would likely have to drastically increase because the company would need to market its platform in many more states.

Including stock-based compensation in the equation, DraftKing’s Q1 loss came in at a staggering $346 million, or 87 cents per share.

Its Q1 loss was way bigger than its Q1 revenue of $312.28 million, and the company’s net loss soared about 500% year-over-year.

Given those numbers, I think it will take many years for DraftKings to become profitable, if it ever manages to do so.

The Bottom Line on DKNG Stock

The latest data strongly indicates that DraftKings is in way over its head in the hyper-competitive U.S. sports gambling market, while the company will not be profitable for many years.

As a result, with the stock’s valuation remaining gigantic, I recommend that investors sell the shares.

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. 


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