After the onset of the Covid-19 pandemic, one of the darlings on Wall Street was a digital sports entertainment and gaming company known as DraftKings (NASDAQ:DKNG). As sports betting and i-gaming became popular, the value of DKNG stock increased dramatically.
The problem is that the rally was based more on hope and hype than actual financials and fundamentals. Bear in mind that the DraftKings share price topped out in early 2021, a time when overeager traders bid up the stock prices of a number of unprofitable companies.
In many cases, those stocks fell almost as quickly as they rose. To loosely quote Benjamin Graham and Warren Buffett, in the short term, the stock market is a voting machine (based on sentiment), but in the long term it’s a weighing machine (based on a company’s actual value).
As time goes on, the market is weighing DraftKings and evidently not liking the results very much. Even seemingly positive news, it appears, hasn’t helped the stock stay afloat, and that’s certainly a bad sign.
DKNG Stock at a Glance
Just as greed has caused some sports betting and i-gaming fanatics to lose their capital, greed also is responsible for a number of DKNG stockholders losing their money in 2021.
It’s a cautionary tale about what can happen when traders get caught up in a hype phase. Sure, it’s important to be aware of trends in the markets. But ultimately, hard data and facts should be your guide.
As DKNG stock soared from around $10 to a peak of $74.38, that would have been a great time for the investors to take profits and thank their lucky stars.
Perhaps they should have thanked Reddit traders as well, as it’s possible they helped propel the DraftKings share price. In any event, the crash that ensued was swift and unforgiving.
Good News Isn’t Helping
By the middle of January 2022, DKNG stock had tumbled to $23 and showed no signs of turning around. This happened despite events that should have given the stock a major boost.
For instance, the New York State Gaming Commission approved four mobile sports betting operators to accept and process sports betting activity. Among those approved operators was DraftKings.
This announcement was revealed on Jan. 7. DKNG stock traded at $27 on that day. But since then, the stock has fallen to prices as low as $18.
On Jan. 12, DraftKings bragged that it had been selected as the official sportsbook provider of the Oregon Lottery. Again, this didn’t prevent the company’s stock from losing value.
InvestorPlace contributor Thomas Niel also pointed out a problem: there are only a few more U.S. states that have yet to legalize sports betting.
Holes in the Argument
Niel wrote that in California and Florida, “multiple stakeholders (state governments, Native American tribes, commercial gaming) are still trying to iron it all out.” Meanwhile, in Texas, where the legislature only meets during odd-numbered years, legalization isn’t likely until at least 2023.
We can see numerous holes forming in the bullish argument for DKNG stock. The biggest hole of all, though, may be the financial hole that DraftKing can’t seem to dig itself out of.
Consider this: the company sustained a $989.1 million net loss attributable to common stockholders in the nine months ended Sept. 30, 2020. That’s nearly a billion dollars in just nine months’ time.
Fast-forward to the nine months ended Sept. 30, 2021. During that time, DraftKings’ net loss was even deeper, totaling $1.2 billion.
How did this happen? Clearly, DraftKings spent too much during those nine months. For example, while the company generated $822.7 million in revenue, it spent $703.1 million on sales and marketing.
There were also several other categories of spending, each costing DraftKings nine-figure dollar amounts.
The Takeaway on DKNG Stock
The evidence shows that DraftKings hasn’t exercised enough fiscal discipline. Moreover, the apparently positive catalysts haven’t done much to boost the DKNG stock price.
It’s fine to envision a future for sports betting and i-gaming in the U.S. However, it certainly looks like DraftKings is on the wrong side of the hype cycle now. Therefore, it just doesn’t make sense to gamble your hard-earned capital on DKNG stock in 2022.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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