Recent statistics released by New Jersey and Pennsylvania communicated an increase in sportsbook numbers. Despite being out of football season, Pennsylvania experienced 27.6% growth in February wagers versus 19.7% a year ago. Meanwhile, New Jersey booked $1.1 billion in wagers. Although sports betting has discovered systemic momentum, DraftKings (NASDAQ:DKNG) stock still remains in a tight spot.
The company recently disappointed its investors with poor full-year guidance. DraftKings’ management expects an EBITDA loss of between $825 million and $925 million this year, significantly worse than the initial $699 consensus. The firm’s stale earnings estimate is likely due to rising input costs. Inflation is becoming a severe problem for most companies, especially DraftKings, as it is trying to fend off competitors while simultaneously striving for profitability. The company is facing a crowded industry and needs to expand quickly. However, this hasn’t been possible due to rising input costs.
A closer look at DKNG’s key metrics paints a clear picture of the firm’s growth struggles. To elaborate, the stock’s return on invested capital (ROIC) of negative 80.96% and its return on equity (ROE) of negative 70.68% indicates that its expansionary trend has stagnated. Growth stocks usually exhibit a high ROIC and ROE due to product differentiation; however, that certainly hasn’t been the case for DraftKings.
Another worrying sign is that DKNG stock is trading at an industry valuation premium as its price-to-sales and enterprise-value-to-sales ratios are at a peer surplus of 3.21x and 3.06x, respectively. DKNG’s market valuation isn’t justified; it is simply a case of investors getting ahead of themselves.
Yes, Sportsbook numbers are on the up, but that doesn’t mean a DKNG stock surge is warranted. DraftKings is in questionable shape amid economic headwinds. Furthermore, DKNG stock is poorly priced as it isn’t providing the necessary economic returns to its shareholders, which its key metrics convey. Whether you choose to buy, sell or avoid here is up to you, but I’m bearish for now.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.
