DraftKings (NASDAQ:DKNG) stock has been in the midst of a pullback for the past few months. DKNG stock has shed more than 50% of its value in the past three months. The dip presents an excellent opportunity for aggressive investors to load up on the stock at a fantastic price.
DraftKings is a leading online sports betting (OSB) and iGaming platform in the North American region. Over the past year, it has grown its top-line at a spectacular 100% on a year-over-year basis as it continues to expand into new territories. Each new state it opens its operations in can generate incredible customer and revenue growth. Moreover, it takes only two to three years to achieve profitability in a newly entered territory.
Considering the massive growth runway ahead for the company, DKNG stock is remarkably undervalued. However, it is a long-term play in its rapidly evolving sector that could pay a lot of dividends to its investors down the road.
The Profitability Issue
Profitability has been a bone of contention with DraftKings since its inception. Concerns surrounding its mounting customer acquisition costs had investors questioning their bets. Its sales, general, and administrative expenses have consistently outpaced top-line growth. Consequently, the apprehensions surrounding DraftKings continue to grow and leave a question mark on whether it will ever be profitable.
DraftKing’s management has been clear in presenting the company’s road to profitability. They have stated that the platform can be profitable in every new state it enters within two to three years. Moreover, if it can continue this trend, it is likely to achieve profitability with the whole enterprise.
The company has lived up to its management claims in multiple states. Perhaps, achieving profitability within a couple of years in its most important state in New Jersey was its biggest accomplishment. Estimates suggest that DraftKings could grow at over 25% through 2026, which means it could turn profitable on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by 2024.
DraftKings has just scratched the surface with its business as it believes that the U.S. market could be worth $67 billion once fully legalized. Hence, it has a massive opportunity ahead of which remains largely untapped. OSB and iGaming legalization will gain more momentum in the coming years, which will continue to expand the company’s addressable market.
DraftKing’s is currently valued at around its lowest since going public despite growing at a tremendous pace with every passing quarter. Moreover, it only operates in 14 out of the 50 U.S. states and has done a fabulous job maximizing revenues from the legalized states. However, major betting states, including Florida, California, and Texas, are yet to come online for the company and bring in the big bucks.
New York recently went live for DraftKings, and its revenues will start to reflect from the second quarter this year. With the weakening economic conditions of most states, you’d expect more states to legalize OSB and iGaming in the coming years. It is a massive income source for states which will help avoid taxing individuals. OSB operators will be paying a whopping 51% to New York state in taxes.
Therefore, it’s only a matter of time until more states enter the fray.
Final Word on DKNG Stock
DKNG stock has struggled to get going over the past several months. Investors are concerned about its operating leverage and profitability. Though these concerns are valid, investors must assess the company’s profitability on a state-by-state basis. Moreover, with only 14 legalized states, it has a massive growth runway ahead that cannot be ignored. Hence, DKNG stock remains an excellent OSB and iGaming play at this time.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.