After falling a punishing 62% over the past six months, shares of DraftKings (NASDAQ:DKNG) look to have bottomed and are trending higher coming off the Super Bowl.
The Boston-based online sports betting company was a big spender during the Feb. 13 Super Bowl between the Los Angeles Rams and Cincinnati Bengals. The company held several big promotions tied to the football game, which is the biggest sporting event in the world, attracting more than 100 million viewers.
Those promos included giving away $10 million in free bets and promotions to people who used its app to wager on the game, including a $1 million free bet prize. DraftKings also advertised heavily during the extravaganza, including an ad that called on gamers to download its app and participate in its million dollar contest.
The Super Bowl exposure seems to have helped DKNG stock, which looks to have bottomed at $17.29 in the days following the big game and has since rallied 36% higher to $23.52 a share. While DraftKings stock is still 68% below its 52-week high of $74.38 a share, there is cautious optimism that the worst of the selloff is now over.
DKNG Stock Sees Effect of Sports Betting’s Big Moment
DKNG stock is reaping the benefit of management’s spending heavily to promote the platform amid a very big moment in sports betting.
After years of being limited to a selected few states such as Nevada and New Jersey, sports betting is now legal in 30 U.S. states and Washington D.C. Sports betting has also been legalized nationally in neighboring Canada.
Cash strapped governments have suddenly turned bullish on sports betting as a means of generating new tax revenue coming out of the pandemic. And legit gambling on football, basketball and hockey games is taking off big time. In January, a record $1.6 billion was spent on sports betting in New York, the first month in which gambling was legal in that state.
The American Gaming Association forecast that $7.6 billion was wagered on this year’s Bengals-Rams game, more than double the $3.3 billion that was bet on last year’s Super Bowl between the Tampa Bay Buccaneers and the Kansas City Chiefs.
The explosive growth in sports betting has DraftKings and competitors such as FanDuel and Bet365 scrambling to raise their profiles and attract users as they jockey for market share in the fast-growing sector. The market for sports betting is forecast to exceed $105 billion annually by 2025, according to an industry report by TechNavio.
Three Years of Growth
DraftKings stock has also been helped by the company’s latest earnings report delivered on Feb. 18 that showed its finances moving in the right direction.
For the fourth quarter ended Dec. 31, DraftKings reported $473.3 million of revenue, up 47% from $322.2 million generated in the same quarter a year earlier. For all of 2021, DraftKings reported $1.296 billion in revenue, which was more than double the $614 million generated in 2020.
DraftKings has now reported three consecutive years of accelerating revenue growth. The company grew its revenue by 17.9% in 2018, 42.9% in 2019, 90% in 2020, and 111% in 2021.
Those numbers have given analysts and investors some confidence that DraftKings, which remains unprofitable, is at least growing and gaining market share in an increasingly competitive market. Equally impressive has been that DraftKings has been growing the average revenue per unique player, which rose to $77 in Q4 2021 from $65 in the same quarter of 2020.
Metrics also show that player engagement on DraftKings sports betting platform grows over time.
Concerns on Big Marketing Spending
While all that is positive, DraftKings continues to spend in excess of $500 million on marketing, which is holding back the company’s profitability. The company is spending more than three-quarters of its revenue (77%) to market itself and gain market share in new states that have opened up to sports betting, such as Michigan, Virginia and Tennessee.
Wells Fargo recently downgraded DKNG stock to “equal weight” from “overweight” previously, citing the company’s heavy marketing spend and rising costs are reasons for concern. Wells Fargo also cut its price target on DraftKings to $19 a share from $41, saying that it doesn’t see the company becoming profitable until 2025, at the earliest.
Among 25 analysts who cover the company, the median price target on DraftKings stock is $33, implying 40% upside from where the stock currently sits.
Hold on DKNG Stock
DKNG stock remains a tricky investment. There’s no question that the market for sports betting is exploding and that DraftKings is growing at a fast clip. However, the company is not yet profitable and is spending the majority of its revenue on marketing itself to new customers around the U.S.
It’s likely that the share price will be held back until the company achieves a market-leading position, lowers its marketing budget, and turns a profit. While the shares have recovered in recent weeks they have a long way to go to retest their highs.
With all this uncertainty, investors should avoid DraftKings for now. DKNG stock is not a buy.
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.
