DraftKings Stock Has Limited Near-Term Upside as Headwinds Abound

Fantasy games and sportsbook operator DraftKings (NASDAQ:DKNG) stock slumped drastically in early December, following comments from the influential short-seller Jim Chanos.

DraftKings (DKNG) logo on a phone
Source: Lori Butcher / Shutterstock.com

He is betting against DKNG stock because of what he says are high valuation levels.

On Dec. 3, shares of the popular online mobile sports betting pioneer dipped as low as $27.48, and hit the lowest level since July 2020. DKNG stock currently hovers around $30.

In fact, the all-time high (ATH) of $74.38 seen in March is now in the rear-view mirror. Year-to-date (YTD), DraftKings shares have lost more than 32%.

Online sport betting have lately been gaining traction, in part due to the pandemic-triggered stay-at-home and digital adoption trends.

According to Grand View Research, the global sport wagering market should exceed $140 billion by 2028. Such a growth would mean a compound annual growth rate (CAGR) of over 10% between 2021 and 2028.

Meanwhile, sports betting legalization has also been expanding stateside. S&P Global (NYSE:SPGI) suggests, “the increase in wagering comes as sports betting is now legal in 27 states and Washington, D.C.”

As a leading player in a fast growing sector, DraftKings stock should benefit from long-term prospects in iGaming and mobile sports-betting.

However, there could still be stiff headwinds on the path to profitability, such as increased competition and potential pandemic-related restrictions on sport-events.

Today, we take a closer at what might be in store for DKNG stock in 2022.

How Recent Quarterly Results Came

In April 2020, DKNG made its public debut via a reverse merger with Diamond Eagle, a special purpose acquisition company (SPAC).

Management issued third-quarter metrics in early November. Revenue of $212.8 million was in-line with Q2 guidance and implied growth of 60% year-over-year (YOY).

In addition, monthly unique payers and average revenue per monthly unique payer, two other key performance indicators, grew by 31% and 38%, respectively.

Net loss for the quarter and diluted loss per share came in at $545 million and $1.35, respectively. In the year-ago period, they had been $ 395.7 million and $1.11, respectively. Cash and equivalents ended the quarter at $2.4 billion compared $1.8 billion in the prior-year quarter.

“One of our pillars, we think, for long-term growth will be global expansion,” CEO Jason Robinson said on the earnings call. “We don’t have a set time table. We kind of look at different things as they come about as long as they fit our long-term strategy.”

Looking ahead, management raised the midpoint of 2021 revenue guidance. Prior to the release of the quarterly report DKNG stock was around $45. Since then, shares have lost about 25% of their value.

Adding DKNG Stock to Portfolios

Among 30 analysts polled, Draftkings stock has a “buy” rating. Also, the consensus of 25 analysts for a 12-month median price target stands at $65, implying about a 100% upside potential from current levels. The 12-month price estimates currently change between $34 and $105.

DKNG shares trade at 6.31 times book and 9.86x sales value. These metrics imply a relatively high valuation for a stock that is not yet profitable.

By comparison, Caesars Entertainment (NASDAQ:CZR), U.K.-based Entain (OTCMKTS:GMVHY), Fubotv (NYSE:FUBO) and Penn National Gaming (NASDAQ:PENN) trade at around 2.30x, 2.61x, 3.98x, and 1.59x sales value, respectively.

Despite Q3 topline figures that missed analysts’ expectations, long-term growth potential for DraftKings still remains solid. However, the company is likely to face more challenges and even dilution before achieving long-term goals in the years ahead. Thus, interested investors might want to wait on the sidelines for now.

Alternatively, people could consider buying an exchange-traded fund (ETF) that provides exposure to DKNG stock as a holding.

Examples include the Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK), the iBET Sports Betting & Gaming ETF (NASDAQ:IBET), the Roundhill Sports Betting & iGaming ETF (NYSEARCA:BETZ), and the VanEck Gaming ETF (NASDAQ:BJK).

The Bottom Line on DKNG Stock

DraftKings and Flutter Entertainment (OTCMKTS:PDYPY) are two leading names in the U.S. sports betting market. Moreover, DKNG management is planning to expand operations by closing a $1.56 billion acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG) in early 2022.

The company is also working on a non-fungible token (NFT) ecosystem, i.e., the DraftKings Marketplace. DKNG and the National Football League Players Association (NFLPA) recently announced launching a gamified NFT collection, to debut on DraftKings Marketplace in the 2022–2023 NFL season.

However, Draftkings’ high cash-burn, lack of profitability, and increasing competitive headwinds have recently lead to a negative investor sentiment.

Therefore, wait for a further decline below the $30 level before hitting the “buy” button in DKNG stock. 

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


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