Unfortunately, digital sports entertainment and gaming company DraftKings (NASDAQ:DKNG) has not become a Cinderella story. After a wild rally, the longtime owners of DKNG stock have lost most of their gains.
DraftKings’ decline shows that no one can make “easy money” in the stock market. It also provides evidence that following the crowd is not always a good idea for investors; when everybody and his uncle was betting on DraftKings, investors should have sold, not bought, DKNG stock.
The technical damage suffered by DKNG stock was considerable. It won’t be easy for the shares to mount a sustained comeback, as DraftKings would have to report impressive financial results before such a scenario could materialize.
While the company recently reported appealing financial results, investors must always dig deeper, stay skeptical, and prioritize companies’ profits.
A Closer Look at DKNG Stock
With a five-year monthly beta of 1.96, DNKG stock has been volatile. The latter conclusion is reinforced by the stock’s wide 52-week range of $16.56 to $74.38.
On the other hand, DraftKings’ volatility is appealing for some investors. Indeed, DraftKings’ customers who bet on sports enjoy speculating, and many investors have the same characteristic.
From a technical point of view, though, DKNG stock might not be worth gambling your hard-earned money on. Its rally that peaked at $74.38 in March 2021 is in the rear-view mirror now, and sellers have completely taken over the trading in the stock.
Frustratingly for the long-term owners of DKNG stock, the shares have made a round trip from $20 to $74 and back. So the trend has been very unfriendly to DraftKings’ shares lately.
Still, dyed-in-the-wool contrarians might see the stock’s decline as a buying opportunity. Before anyone considers “bottom fishing” with DraftKings, though, it’s important to delve into DraftKings’ financial data.
First, the Good News
Morgan Stanley analyst Thomas Allen observed that sports betting operators often enjoy profits margins in the range of 25%-30%. But, as I’ll explain, DraftKings is actually not in the black.
On the other hand, the bulls can celebrate DraftKings’ impressive top-line results.
Specifically, the company reported fourth-quarter revenue of $473 million, up 47% year-over-year and 8% above DraftKings’ previous guidance.
The company also touted its ability to acquire, retain, and generate revenues from its customers.
Indeed, DraftKings’ monthly unique payers (MUP) on the consumer side of its business increased 32% year-over-year last quarter, while the company’s average revenue per consumer MUP increased 19% YOY.
A Wait-and-See Stock
Judging by the continued downward trend of DKNG stock, DraftKings’ user and revenue growth evidently weren’t enough to entice many large investors to buy the shares.
Moreover, DraftKings’ positive stats didn’t seem to impress JP Morgan analyst Joseph Greff very much. Greff maintained his “neutral” rating on the stock in the wake of DraftKings’ Q4 results and issued a not particularly ambitious $19 price target.
For Greff, apparently, DraftKings’ poor bottom-line results are a problem, and he thinks the company has other significant issues.
“We wait for more confidence” in DraftKings’s “path to profitability and we point to the lack of insider buying, so, to us, it’s a wait-and-see stock,” the JP Morgan analyst wrote.
When it comes to the company’s losses, no one can argue with the data. In 2019, DraftKings reported a net earnings loss of $142.7 million. Unfortunately, the company’s net loss ballooned to $1.23 billion in 2020 and then to $1.52 billion in 2021.
The Bottom Line
In light of DraftKings’ widening net losses, can we really blame Greff for waiting to become more confident in the company’s outlook before getting more bullish on its shares?
Waiting is a sensible strategy to utilize with DKNG stock now. And always bear in mind, not every downtrodden stock is necessarily a screaming bargain.
In all likelihood, sports betting will remain a robust and lucrative business. Until DraftKings can turn its financial results around, though, this Cinderella-story-gone-wrong will not have a happy ending.
On the date of publication, David Moadel 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.
