A Bet on Draftkings Stock Is Not Worth the Risk

Down 55% in the past six months, it might finally be time to place a bet on shares of online sports betting company Draftkings (NASDAQ:DKNG) stock.

DraftKings (DKNG) logo, magnified, on its app.
Source: Lori Butcher/Shutterstock.com

To date, DKNG stock has been a bad bet. At its current level of $21.86, the Boston-based company’s share price is 70% below its 52-week high of $74.38.

That most of the decline has occurred during the NFL football season, which is when sports betting is at its peak culminating in the Super Bowl, seems illogical.

Regardless of the reasons behind the plunge, Draftkings stock has fallen so low that many analysts now see a great entry point, especially as more U.S. states legalize sports betting. Wall Street professionals who were urging investors to sell the stock last fall are now upgrading their ratings to “buy.”

Big Opportunity

DKNG shares recently bounced off their 52-week low of $17.42 after investment bank Morgan Stanley (NYSE:MS) upgraded the stock to “overweight” from “equal weight” previously and maintained a $31 price target.

In its assessment, Morgan Stanley said that Draftkings is well-positioned to capitalize on the growth of sports betting and legalization of online gambling in the U.S. and other countries such as neighboring Canada. Draftkings stock jumped 18% following the bullish report from Morgan Stanley, which the investment bank labeled “Too Big an Opportunity to Ignore.”

Specifically, Morgan Stanley said “we believe at the current price ($19 per share), one should not ignore that DKNG is a leading market share player in what will be a very large profitable market.” Morgan Stanley’s late January upgrade arrived just as New York State legalized sports gambling, underscoring just how big the market that Draftkings operates in could become.

New York State residents placed $603 million worth of bets in less than two full weeks of legalized gambling, including $134 million placed with DraftKings, according to data from the New York State Gaming Commission. Sports betting has now eclipsed $1 billion in the Empire State.

And that’s just one state, albeit a big one. Currently, some 30 U.S. states covering about 100 million people have legalized sports betting, leaving plenty of room to grow. Morgan Stanley said it now sees a total addressable market in sports gambling of $21 billion by the year 2025 as more states move to legalize, and capitalize on, revenue generated from sports gambling.

Many governments have come to view taxes levied on sports betting as a new revenue stream coming out of the global pandemic when their finances were strained.

Lack of Profits

While the market opportunity in front of Draftkings is huge, the company continues to be weighed down by a lack of profits. In its most recent quarterly print, Draftkings reported that its net loss widened to  $545 million, which was 38% greater than the $395 million loss posted a year earlier. Draftkings next reports earnings is on Feb. 18.

And despite a growing number of U.S. states legalizing sports betting, the most optimistic outlook on Wall Street does not see Draftkings turning a profit until 2024, at the earliest. Many analysts say the company could remain in the red past 2025.

The main reason for the ongoing losses is that Draftkings continues to spend heavily on marketing and advertising to attract users in what is a very competitive market. Through three quarters of 2021, DraftKings more than doubled its sales and marketing spend to $703 million, led by $303.7 million spent in the third quarter of last year alone.

This spending, the company says, has enabled it to grow its number of active users to 1.3 million people and counting. But the growth has been expensive for Draftkings. Still, at current levels, DKNG stock is now relatively cheap, trading at a price-to-sales ratio of 9.5, which is the lowest level in DraftKings’ history as a publicly traded company.

The Bottom Line

There are certainly plenty of reasons to like Draftkings stock where it currently sits. At under $25 a share, the stock offers a great entry point for investors who have a long time horizon. However, the market remains volatile and Draftkings has been hit harder than most stocks in recent months. The worst may not be behind it. On top of that, the company continues to rack up losses and faces stiff competition in the fast growing sports betting industry.

With so much uncertainty remaining, it is difficult to recommend Draftkings right now. Best to wait for the gambling market to mature throughout the U.S. and for Draftkings’ market share and financial position to improve before buying in. Right now, a bet on DKNG stock is not worth the risk. Pass.

 On the date of publication, Joel Baglole held a long position in MS. 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.  


Article printed from InvestorPlace Media, https://investorplace.com/2022/02/dkng-stock-dont-gamble-on-draftkings-stock/.

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