With DraftKings (NASDAQ:DKNG) moving further and further into the red and continuing to face very tough competition, the outlook of DKNG stock is poor.
Also likely to weigh on the shares going forward are the stock’s still-high valuation and a key macro issue.
It’s true that the company’s revenue is still climbing tremendously. In Q3, its top line soared 60% year-over-year to $213 million. On the other hand, it is worth noting that DraftKings’ revenue actually fell nearly 30% from Q2’s $298 million.
That drop could have been due to seasonality and reduced fear of the novel coronavirus or it may indicate that DraftKings is losing some traction in the very competitive online gambling market. Alternatively, of course, the sequential revenue drop could have been caused by a combination of the two factors.
But even if the decrease of the company’s revenue in Q3 versus Q2 was entirely due to seasonal factors and Covid-19 issues, the large YOY surge of its top line was not all that impressive.
First of all, the company entered a few new states –Wyoming, Arizona and Connecticut — for the first time in Q3. So some of the revenue increase was caused by the expansion of the company’s geographical footprint.
Additionally, the amount of red ink spilled by DraftKings continues to grow tremendously.
Specifically, its loss before taxes and equity investments jumped to nearly $541 million from nearly $396 million during the same period a year earlier and $305.5 million in Q2.
The company’s Q3 loss from operations surged to $546.5 million last quarter, versus a loss of just over $348 million during the same period a year earlier and $305.5 million in Q2 of 2021
Tough Competition and High Valuation
I’ve long warned about intense competition in the online sports gambling sector. In recent months, other pundits have come to the same realization.
For example, in October, a headline from Yahoo News proclaimed that, “Competition in online sports betting is fierce — and not profitable.”
The article also quoted a note from Wells Fargo which estimated that DraftKings’ U.S. market share was only 19% in the first half of 2021, versus 33% for FanDuel, 13% for MGM’s (NYSE:MGM) joint venture — BetMGM — and 4% for Caesar’s (NASDAQ:CZR).
One consequence of the steep competition among the companies is the rapid increase of DraftKings’ sales and marketing costs.
In Q3, its sales and marketing expenditures jumped nearly 50% versus the same period a year earlier, reaching nearly $304 million. In Q2, its sales and marketing costs were slightly over $170 million.
Meanwhile, despite the fact that the shares have tumbled well over 50% since their September peak, the valuation of DKNG stock remains steep. Specifically, the shares are changing hands for over six times analysts’ average 2022 sales estimate for the company.
With interest rates seen as likely to climb next year, investors are becoming much more weary about investing in companies that are losing large amounts of money.
Given the huge amount of red ink that DraftKings is spilling, this change in investors’ attitudes does not bode well for DKNG stock, at least in the short-to-medium terms.
The Bottom Line on DKNG Stock
Given the intense competition of the U.S. online sports betting market, DraftKings’ sales and marketing costs are likely to continue to quickly increase for the foreseeable future.
As a result, its losses will probably continue to grow, disenchanting many investors in the current environment.
As a result of these points, DKNG stock is likely to continue to decline, at least in the short-to-medium term. Consequently, I advise both traders and investors to 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.