CNBC commentator Jim Cramer recently likened DraftKings’ (NASDAQ:DKNG) short-term potential to a “house of pain.” His prediction turned out to be spot on, as DKNG stock is down more than 20% since his Nov. 15 call, even after today’s 8%-plus pop. And lest you want to blame this performance on the “Cramer effect,” consider that shares currently sit nearly 60% below their March high.
The steady decline in shares of the Boston-based sports betting operator has many throwing up their hands and wondering when the stock will find its bottom. Until it does, DKNG stock is not worth betting on.
DraftKings Has a Huge Market Opportunity
The persistent weakness in DKNG stock seems to fly in the face of logic. With the NFL and NBA seasons now in full swing, this is supposed to be DraftKings’ time to shine, especially with its fantasy football offering.
On Nov. 5, the company reported third-quarter results with revenue of $213 million, up 60% year over year. While the revenue growth was impressive, it came in below estimates and the company posted a wider-than-expected loss.
On the plus side, DraftKings said its monthly unique users rose to 1.3 million, up 31% year over year and 19% over the second quarter. Management also forecast full-year revenue growth of at least 93% and another 43% in 2022.
The market opportunity in front of DraftKings is potentially massive given that online sports betting is still in its infancy in the United States. Currently, online sports betting is only legal in about two dozen states, with DraftKings having an online or retail presence in 17 of those.
In neighboring Canada, the federal government legalized sports betting nationwide over the summer, paving the way for the country with nearly 31 million adults to legally bet on hockey games and other sporting contests for the first time. The Canadian government sees taxing sports betting as a way to generate much-needed revenue coming out of the Covid-19 pandemic.
The growing legalization of sports betting is good news for DraftKings and should be helping DKNG stock rise. The fact that the company’s share price continues to fall as the online sports betting industry grows and matures has been extremely frustrating to DraftKings’ shareholders.
DraftKings’ Weak Spots
DraftKings’ growth has come at a cost. The company spent a total of nearly $1 billion on sales and marketing in 2020 and the first two quarters of 2021. Many analysts see that as a hefty price to pay to attract users to its platform.
Additionally, DraftKings faces stiff competition from other online sports betting companies, as well as casino operators. FanDuel, Penn National Gaming (NASDAQ:PENN), Entain and Caesars Entertainment (NASDAQ:CZR) are all giving DraftKings a run for its money. Currently, DraftKings is second to FanDuel in the online sports betting market.
Another issue impacting DKNG stock is the fact that the company isn’t profitable. In the third quarter, losses widened to $545 million from $396 million in the same quarter of 2020. Many investors focused on the company’s mounting losses rather than its revenue and user growth in the Q3 report.
While analysts forecast the company will turn profitable sometime in 2023, management hasn’t outlined a clear path to profitability and that lack of clarity has weighed on the share price. For now, DraftKings maintains it is focused on growing its user base and gaining market share, which will continue to come at a cost.
The Bottom Line on DKNG Stock
There’s a saying on Wall Street that investors shouldn’t try to catch a falling knife. This is certainly true for DKNG stock.
Could today’s pop be the first step in the right direction? Sure. But it could also be a blip before shares turn lower again. Only time will tell, and investors should remain on the sidelines until the answer is clear.
DraftKings has a few things working in its favor, namely a growing user base, expanding revenue and market share gains. However, investors have chosen to focus on the company’s heavy spending, lack of profitability and stiff competition. Weighing the positives against the negatives, it appears that the negatives are winning right now. As such, investors should wait for the share price to bottom. 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
