- DraftKings (DKNG) has been brutalized in the current market selloff, down 52% year-to-date.
- Much of the problem stems from the company’s heavy marketing spending, which has led to mounting losses.
- While some analysts are turning bullish on DKNG stock after the selloff, the risks of taking a position remain too great.
Can things get any worse for sports betting company DraftKings (NASDAQ:DKNG)? It’s been excruciatingly painful for shareholders who’ve held on during the current carnage. Down 52% year-to-date (YTD) and 80% below its 52-week high of $64.58 per share, DKNG stock has been one of the hardest hit during the market downturn.
After hitting an all-time low at less than $10 on May 11, the Boston-based company’s share price has bounced higher to now trade at $13.40, giving some hope to wounded shareholders that the worst of the smackdown might finally be over. But with volatility persisting and investors continuing to seek safety in profitable blue-chip securities, there appear to be no guarantees for DraftKings.
DraftKings Is Marketing to the Masses
It wasn’t supposed to be like this for DraftKings and its shareholders — at least, not on paper. As Canada and a growing number of U.S. states legalized sports betting coming out of the pandemic, it was supposed to earn more revenue and bank huge profits.
In reality though, the company has had to spend heavily to market itself to consumers and raise awareness of its sports betting and fantasy sports offerings. Unfortunately, DraftKings has marketed itself into a financial hole. The company spent $981.5 million on sales and marketing last year, eating up more than three-quarters of its 2021 revenue.
During its most-recent earnings call with analysts, DraftKings’ management said it is currently spending more than twice the company’s sales to develop and grow the business. All that spending led DraftKings to report an adjusted loss of $676.1 million last year, which was nearly double the company’s loss in 2020.
The massive marketing spending and expanding losses have led many analysts and investors to sour on DKNG stock, resulting in the plunge over the past six months. While management acknowledges the big spending on marketing and sales, they continue to stress that it is necessary to grow the business and secure its future.
Analysts Are Bullish on DKNG Stock
Despite the big annual loss, DraftKings’ revenue has been growing at a brisk clip. It totaled $1.3 billion last year, which was up 111% from 2020. Over the past three years, revenue has grown at a compound annual growth rate (CAGR) of 79%.
To date, several U.S. states have legalized sports betting and more are expected to approve the practice in the next few years. That should provide DraftKings with further growth opportunities, and is one of the reasons why Wall Street analysts are forecasting sales of $1.98 billion in 2022. That would represent 53% growth from 2021. Currently, DraftKings sits in second place among online gambling companies after U.S. market leader FanDuel.
If the avalanche decline in DKNG stock this year has a silver lining, it is that some analysts are starting to turn positive on the company at its weakened share price. Jefferies Financial Group, for example, recently reinstated a “buy” rating on DraftKings stock with a price target of $33. That would be 144% higher than the $13.51 that the shares are currently trading at.
Among 26 analysts offering 12-month price targets on DraftKings stock, the median price target is currently $25, implying 86% upside from current levels. The lowest price target on the stock is $13, which is only slightly lower than where the shares are sitting right now.
Don’t Gamble On DKNG Stock
DraftKings is growing quickly and its future upside is potentially huge, especially after a painful selloff brought the share price crashing back to earth. However, DraftKings is still grossly unprofitable and spending money at an unsustainable rate in an effort to capture market share as more jurisdictions legalize sports gambling.
Massive marketing spending and heavy financial losses make it difficult to justify taking a position in DraftKings right now. Ongoing uncertainty and volatility in the broader stock market make placing a bet on it that much riskier. For these reasons, investors would be best advised to not gamble on DKNG stock.
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.