Investing in DraftKings (NASDAQ:DKNG) stock means accepting increasing losses moving forward. The digital sports entertainment and gaming firm is growing its top line, but unique factors are continuing to stress its bottom line.
DraftKings is part of a larger effort in which firms will compete aggressively to gain share of mind as the early online gambling space takes form. Let’s dive into the company’s Feb. 18 earnings report in order to understand better what is happening at the Boston-based firm.
Earnings Indications
Investors who consider DraftKings for its pure growth potential will likely respond positively to the company’s fourth-quarter earnings report. Top line revenues improved by 47% on a year-over-year basis. And the narrative was even stronger for all of 2021, with sales more than doubling to reach $1.296 billion.
Unfortunately, that growth narrative hasn’t seemed to be convincing for the majority of investors. That is reflected in the fact that DKNG share prices roughly halved throughout 2021. The issue is that investors are eager to see profitability.
DraftKings’ net losses are widening. The $243.45 million net loss it suffered in the fourth quarter of 2020 increased to a $326.29 million net loss to end 2021. On a year-over-year basis, the net losses didn’t accelerate at an alarming pace, instead only increasing by roughly 24%. The problem of increasingly widening losses comes as a turf war looks to be heating up.
That should make profitability increasingly difficult to come by moving forward.
Turf Wars
Online betting firms are increasing their spending in an effort to gain what they see as their most important customers. DraftKings CEO Jason Robins explained it briefly stating, “Typically the first year, sometimes two years, of customer acquisition is the strongest cohorts that you acquire and I think it’s really important that we continue to invest there.”
What that means is that DraftKings’ expenses are going to rise significantly as marketing costs increase. DraftKings experienced exactly such a situation in launching in New York. He also stated that marketing costs which increased by 45% in Q4 didn’t include New York-related expenses.
The company is already anticipating widening losses as competition for those early customers heats up. As noted, investors were already pressuring DraftKings for profitability. However, that profitability is going to be farther and farther away as marketing expenses drive up net losses in the coming quarters.
Pressure Increasing
In short, the pressure on DraftKings is increasing. That is evident in Wall Street ratings which have slipped over the past three months. Three months ago DKNG stock carried 17 buy ratings and 10 hold ratings. Today it carries 15 buy ratings and 13 hold ratings.
That said, the average target price sits at $36.80, therefore implying significant upside from current price levels near $23.
Analysts aren’t providing much actionable advice on DraftKings. Morgan Stanley analyst Thomas Allen gives it a target price of $31. That’s below the consensus average although he expects DraftKings to control 24% of online sports betting and 21% of iGaming by 2025. You would think that numbers of that magnitude would give him the confidence to assign it a higher than average target price.
What to Do With DKNG Stock
I think it’s best to exercise caution with DKNG stock right now. Investors were already calling for DraftKings to move toward profitability prior to the earnings report. It is now moving in the opposite direction as stated explicitly by the company.
Investors who place their capital into DraftKings right now are implicitly stating that they believe the company will be able to efficiently outcompete companies like Caesar’s Entertainment (NASDAQ:CZR) in marketing and acquiring new customers. There’s little to suggest that either way. All we know now is that DraftKings’ losses are getting bigger.
On the date of publication, Alex Sirois 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.
