DraftKings (NASDAQ:DKNG) stock has lost over half its value in the last three months.
Sports betting, once seen as a sure way to profit, is now seen as more of a long shot. The problem is it costs a lot of money to get customers.
During the first three quarters of 2021, DraftKings lost about $1.2 billion, while generating sales of a little over $800 million. The fourth quarter, to be announced Feb. 18, looks a little better, but that’s still a loss of over $300 million, 82 cents/share, with revenue of $439 million.
In the go-go market of 2021, investors excused losses as investing ahead of growth. The 2022 stock market is less forgiving.
At the opening bell on Jan. 31, DraftKings stock was selling at about $21/share. That’s a market capitalization of $8.4 billion on what should be revenue of $1.2 billion.
During 2021 online sports betting, still legal in just a few states, was seen as a better investment than physical casinos, due to lower operating costs. The value of DraftKings nearly matched that of long-standing casino operators MGM Resorts (NYSE:MGM) and Caesars Entertainment (NYSE:CZR).
In December Flutter Entertainment (OTCMKTS:PDYPY), a European betting operator that owns Fanduel, had 45% of the online sports book market, against 22% for DraftKings. Caesar’s is third at 11.7%.
DraftKings’ Costs are High
But Wall Street’s view has reversed. On Jan. 31 Caesars was worth $15.6 billion, MGM Resorts $19.5 billion. That’s about twice what DraftKings is worth. All gambling stocks are down over the last three months, but the operators of physical locations are down less. MGM is down less than 12%.
DraftKings tried to minimize customer acquisition costs through a content deal with Walt Disney’s (NYSE:DIS) ESPN, signed in 2020. But this is not exclusive. ESPN also has a deal with Caesars involving fantasy sports, odds, and show production.
Caesars also blitzed the field with a TV ad campaign starring rapper J.B. Smoove and actress Halle Berry. The amount spent advertising online sports betting tripled in 2021. Leagues are also signing sponsorship deals with gambling sites, even before it is legal in many states.
Buy DKNG Stock on the Dip?
As the cost to play has risen, Wall Street has taken a harder look at the numbers.
During the September quarter DraftKings had negative operating cash flow. MGM, on the other hand, had over $500 million in positive operating cash flow, and Caesar’s had $314 million, despite the continuing costs of the Covid-19 pandemic. This made them look more sustainable.
The speed of DraftKings’ slide has many looking to “buy the dip.” ARK Investment (NYSEARCA:ARKK) bought in at the start of 2022. Morgan Stanley (NYSE:MS) raised its rating on DraftKings to overweight with a $31/share price target. The average price target at Tipranks is even higher, nearly $42/share.
The Bottom Line on DKNG Stock
Online sports books are common in most of the world. The names of Asian and European sports books adorn the shirts of many teams.
DraftKings’ stock rose on anticipation of that. Their early entry in the field, through fantasy sports, was seen as effective branding. The deal with ESPN made the odds look shorter.
But gambling is not nearly as easy a business as it seems to be. Capital costs and government regulation can take a company down fast. Caesars’ ad campaign proved that DraftKings is not invulnerable to cost pressure.
If I want to lose money, I don’t need to bet on football games. I’ll just call Charlie (that’s Charles Schwab (NASDAQ:SCHW) to you), my online bookie, and have him buy me some DraftKings stock. My odds are shorter, and his vig is less.
On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack danafblankenhorn.substack.com.