DraftKings Stock May Look Cheap, But It Hasn’t Bottomed Out

Should investors place a bet on DraftKings (NASDAQ:DKNG) stock as the online fantasy sports and betting stock continues to test new lows?

DraftKings (DKNG) website in browser with company logo
Source: Postmodern Studio / Shutterstock.com

Over the last year, DKNG stock has come down 50% and is now 64% below its all-time peak of $74.38 a share reached last March.

The NFL football season was supposed to be a catalyst for shares of the Boston-based company but since the league kicked off after Labour Day, DraftKings’ share price has fallen 58% and now trades at $26.94 a share.

Even the recent news that New York State (population: 19.5 million) has approved DraftKings to operate online gambling has not significantly moved the needle on the stock, which has slipped a further 7% since mid-December. So what will it take to turn around the fortunes of DraftKings?

A Closer Look at DKNG Stock

DraftKings just launched in New York State ahead of the hugely popular NFL playoffs.

Betting on playoff football games is expected to be massive and culminate in the biggest sports betting event of the year, the Super Bowl.

By all accounts, being able to operate in the Empire State should provide some much-needed momentum to DKNG stock.

Analysts continue to fret over the fantasy sports company’s high spend rate, especially when it comes to advertising. Each time DraftKings enters a new market it has to spend aggressively on advertising to attract new customers.

The company spent nearly $500 million on marketing in 2020 and $400 million through the first half of 2021.

While DraftKings grew its revenue from $192 million in 2017 to $615 million in 2020, the company continues to rack up big losses. Through the nine months ended Sept. 30, 2021, DraftKings posted an operating loss of $1.2 billion, more than double the $574 million generated during the first three quarters of 2020.

The lack of profitability and expanding losses also has many on Wall Street down on DKNG stock.

Investors appear to be taking a wait-and-see approach with DraftKings, especially given the relatively new market for online gambling and strong competition within the industry.

Some market observers are calling for consolidation among online gaming concerns.

Big Market

Despite its high cash burn and lack of profits, DraftKings is on the ground floor of what is expected to be a huge industry going forward.

The North American total addressable market for online gambling is forecast to be worth $67 billion annually. DraftKings has projected annual revenues for itself of $6 billion, which would be more than 10 times its $615 million in 2020 revenues.

The market is growing as more U.S. states such as Ohio move to legalize sports betting. Even boring old Canada has legalized sports betting nationally as governments up north see it as a way to boost tax revenues coming out of the Covid-19 pandemic.

To be sure, DraftKings faces stiff competition for gamblers from other online gaming companies such as FanDuel, Caesars Entertainment (NASDAQ:CZR), and Rush Street Interactive (NYSE:RSI), to name only a few.

With only 15 U.S. states having legalized online gambling to date, DraftKings will have to keep spending aggressively in coming years as it moves into new markets and vies for customers in a supercharged market.

Still, some analysts see DKNG stock as being grossly undervalued and on sale at current levels. The median price target on the stock is currently $58, implying a massive 116% upside from current levels.

That said, there are reports that a growing number of short-sellers are targeting the stock as it continues to drift lower.

Wait for DKNG Stock to Hit Bottom

There are no indications that DraftKings stock has hit bottom yet. With the share price continuing to slump lower and lower, now is not the time for investors to take a position in the online gambling stock.

While there is a potentially huge market opportunity ahead for DraftKings and it is currently a market leader, online gambling and sportsbooks remain a nascent industry and the market needs to grow and mature.

Plus, DraftKings needs to turn profitable before sentiment around the company improves. For now, investors should keep DraftKings on their watchlist and wait for a bottom. DKNG stock is not a buy.

Disclosure: On the date of publication, Joel Baglole 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.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.


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