MarketWatch recently compiled a list of Russell 1000 companies that were down at least 50% from their 2021 highs. One of the names on the list was DraftKings (NASDAQ:DKNG) stock.
According to MarketWatch, DKNG was down 52% through Nov. 26, from its 2021 high of $74.38. The good news is that DraftKings was near the bottom of this list of 60 companies. The worst example is StoneCo (NASDAQ:STNE). It’s down 83% from its 2021 high of $95.12.
If you’ve owned DKNG since 2020, it could always be worse.
Analyst earnings estimates have worsened for its fiscal 2021 and 2022. Analysts now expect a 2021 loss of $3.50 per share, up from $2.77 per share three months ago. In 2022, analysts project a loss of $2.32 a share, up from $1.82 a share three months ago.
While DraftKings holds an enviable position in the U.S. sports betting market, analysts seem to be suggesting that it’s going to get worse for shareholders before it gets better.
At this point, DKNG stock appears to be a falling knife. The question for potential investors is whether it’s going to keep falling or bottom out.
I’ll examine both sides of the argument.
DKNG Stock Is Hitting Bottom
If you bought today and the current analyst median target price comes to fruition by the end of 2022, investors are looking at almost 89% upside. That’s a pretty healthy one-year return.
The analyst consensus seems to come in two camps: Some believe it’s a buy – 18 out of the 29 covering DKNG rate it “buy” or “overweight” – while 10 rates it a “hold.” Only one has it at “underweight” or “sell.”
So, even though the company’s loss projections are going up, many investment professionals who cover the stock remain bullish about its long-term prospects.
I feel the same.
I last wrote about DraftKings in October. I discussed how the younger generation has taken to sports betting as a form of entertainment. Instead of going to the movies and blowing $20 to $40 for two hours of entertainment, people take their interest in professional sports to the next level.
Ultimately, I suggested it was a good buy in the $40s. Now trading in the mid-$30s, I’m sure it’s much more challenging to pull the trigger on this falling knife. That’s understandable.
For investors who can’t afford to lose 100% of their investment, DKNG is not a wise investment. However, if you’re speculative by nature, I don’t think there’s a problem buying some now and some more should DKNG fall into the $20s.
Once all 50 states get legalized, sports betting – according to ActionNetwork.com, either in-person or online, is currently legal in 29 states – and assuming DraftKings continues to roll out its growth plans, I don’t see how it’s not making money.
DKNG hasn’t traded in the $20s since May 2020, shortly after merging with the Diamond Eagle special purpose acquisition company in April of that year.
A lots changed about its business since then. In early 2022, it’s expected to close its $1.56 billion acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG). That should help with its expansion plans for online sports betting. It currently offers mobile sports betting in 15 states, reaching approximately 39% of the U.S. population.
Expect that number to increase substantially in 2021 and 2022.
DraftKings Stock Could Fall Another $10
In mid-November, Casino.org contributor Todd Shriber reported UBS’ bearish outlook on the sports-betting stock. UBS sees DraftKings’ EBITDA (earnings before interest, taxes, depreciation and amortization) losses rising in the next two years, finally becoming profitable in 2024.
As a result of its pessimism, UBS cut DKNG’s price target by 31%, from $64 to $44. According to Shriber, Roth Capital doesn’t see it making money until 2025. It initiated coverage of DraftKings on Oct. 11 with a “sell” rating and a $41 price target.
I think the biggest threat to its share price is the money it will have to continue to spend to keep its online sports bettors loyal to the brand. There’s a lot of competition out there, including Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM) and Penn National Gaming (NASDAQ:PENN).
If any of this trio decided to up its customer acquisition spend significantly, DraftKings might not have a choice but to follow along, causing losses to accelerate and its share price to falter some more.
The Bottom Line
I believe DraftKings has a strong brand. The addition of Golden Nugget Online Gaming will undoubtedly help bring some balance to a business driven primarily by sports betting. Using stock to buy GNOG, I think GNOG investors will be happy long-term with the decision to sell to DraftKings.
At this point, I wouldn’t recommend buying DKNG stock at current prices if you can’t afford to buy more should the knife keep falling.
Long-term, I think you’ll win large by betting on DKNG at these prices, but we won’t know for sure until well into 2022 or even 2023. Buyer beware. It’s going to be a bumpy ride.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.