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The Upside in DraftKings Stock Is Too Good to Ignore Right Now

Overall, DraftKings (NASDAQ:DKNG) stock is either a contrarian pick or a weakening growth stock to avoid. Individual investor sentiment is what it is, so one opinion will differ from another.

DraftKings (DKNG) logo on a phone

Source: Lori Butcher / Shutterstock.com

However, what’s certain is that DraftKings’ recent quarterly results point to considerable issues. Those issues have in turn caused DKNG stock to fall over the past month.

That leads to the discussion of whether it is a buy-the-dip contrarian pick, or a growth stock with too many issues. So, let’s dive in.

Start With The Third Quarter

DraftKings’ third-quarter results on Nov. 5 weren’t exactly stellar. The firm essentially surprised the market negatively. DraftKings missed revenue guidance, and losses increased. In fact, DraftKings missed consensus revenue guidance of $236.9 million by quite a large margin, reaching only $212.82 million in sales.

Of course, earnings beats don’t always translate to increasing stock prices. But negative earnings surprises like this one almost always translate to declining stock prices. And that is precisely what happened. DKNG stock has lost roughly a quarter of its value since.

Additionally, the other issue exposed in the recent earnings report was that of accelerating losses. But actually, I think there’s a way to view losses in a positive light.

If we do that, then DraftKings becomes more of a contrarian, buy-the-dip play right now. So, what am I talking about? What’s the positive spin on the increasing losses? Well, let me explain.

Were Losses Bad?

I don’t necessarily view DraftKings’ net losses as being particularly “bad.” What I mean is this: In Q3, the firm saw net losses reach $545 million. That represented a 37.77% increase year-over-year.

However, here’s the positive spin on that news: Revenues increased 60.24% in the same period.

Pull that perspective back to the first three quarters, and the narrative is even more appealing for contrarians.

Through the first three quarters of 2021, net losses increased by 20.9%. But in the same period revenue increased by 181.5%.

I simply don’t see how DraftKings is doing poorly based on those macro trends. Granted, the losses aren’t attractive, but they are slowly going in the right direction. And collectively, DraftKings is a growth company in a growth industry.

So, in my opinion, DKNG stock makes sense in that it is slated to continue to provide growth.

The company is expected to record $1.26 billion in revenue this year. That figure is expected to reach $1.87 billion in 2022. That means DraftKings is likely going to do what a growth stock is expected to do, and grow. It missed guidance in Q3, but it is still a marquee name in sports betting.

That’s how I’d characterize the recent downturn in DKNG stock. DraftKings is still a central player in the nascent sports betting industry, and don’t forget, the sports betting industry is set to quadruple in value by 2025.

Estimates are that it should balloon from $9.5 billion in value to $37 billion by 2025. That overarching truth should temper any negative reaction DraftKings received upon Q3 results. Yes, it missed guidance by $20 million. But overall trends are what they are, and the company is in position to take advantage.

What to Do With DKNG Stock

I think this is a case of when following contrarian advice makes sense. The overarching trends are very positive. Furthermore, there’s a case to be made that DraftKings received an overly harsh market reaction for its recent results.

Additioanlly, Wall Street analysts with coverage of DKNG stock believe it should trade at $65 per share. Meanwhile, its current price is $31.45.

That alone speaks volumes about the potential of DraftKings moving forward. Online betting is legal in approximately half of U.S. states right now, and that number is increasing. All of these signals speak to a larger opportunity that is bound to pull DraftKings higher. And if Wall Street is correct, the returns are bound to be substantial.

On the date of publication, Alex Sirois 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.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.


Article printed from InvestorPlace Media, https://investorplace.com/2021/12/the-upside-in-draftkings-stock-is-too-good-to-ignore-right-now/.

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