Betting On This Stock Is A Mistake

Proprietary Data Insights

Financial Pros Online Betting Stocks Searches In The Last Month

012
RankNameSearches
“#1”DraftKings “2,997”
“#2”PENN Entertainment“563”
“#3”Caesars Entertainment“513”
“#4”Wynn Resorts Limited“477”
“#5”MGM Resorts International“346”

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Betting On This Stock Is A Mistake

In the early 2000s, Congress passed laws to limit online poker.

For years, lawmakers shied away from online gambling.

And then sports betting became a thing.

Initially, two players dominated the space DraftKings (DKNG) and Fanduel.

Somehow, DraftKings convinced regulators to allow it to acquire its rival, making it one of the most recognized players in the space. 

Its record rise from $10 to more than $70 was only matched by its subsequent crash back down to $10.

Yet, it remains the top online betting stock search amongst finanical pros week after week.

In fact, outside of earnings, none of the other stocks in the top five ever break 1,000 searches in a given month.

The global online gambling market size is valued at $57 billion in 2021 and is expected to reach $153 billion by 2030. 

With shares down 70% YTD, is now the time to bet on DKNG?

 

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DraftKings Business

DraftKings (DKNG) is a digital sports entertainment and gaming company.  It offers sports betting and gaming technologies for operators in 17 countries. 

The company operates iGaming in 5 states through its DraftKings brand and Golden Nugget Online Gaming in 3 states. iGaming is just the blanket term for online betting.

Its sportsbook is live on mobile and retail operations in 18 states. Sports betting is a subcategory of iGaming.

Additionally, DraftKings offers the ever-popular fantasy sports, available in six countries, and has an NFT marketplace. Furthermore, DKNG produces content for sports bettors and enthusiasts. 

In Q2 2022, the company reported revenue of $466 million, an increase of 57% compared to $298 million during the same period in 2021. 

It averages 1.5 monthly unique players on its platform, an increase of 30% compared to last year’s Q2 numbers. 

DKNG generates an average of $103 from its monthly unique players, an increase of 30% compared to Q2 2021. 

Later this year, the company plans to launch in Ontario, Canada, and believes its recent acquisition of Golden Nugget Online Gaming can help increase revenues for 2022 and beyond. 

If more states open gambling up, it should boast well for DKNG stock and its shareholders. 

Financials

 

Financials

Financials

DKNG experienced explosive revenue growth over the last four years. 

The firm went from $226 million in revenues in 2018 to $1.2 billion in 2021, a 4.7x move. 

It is projected to finish 2022 with revenues ranging from $2.08 billion to $2.18 billion. 

However, the firm is not yet profitable. 

Operating cash flow came in at -$772.4 million last year with net income at -$1.56 billion. 

Thankfully, the firm has $1.5 billion in total cash against total debt of $1.33 billion. Its current ratio of 2.3x is solid, as it can easily pay off its short-term liabilities.

Valuation

 

Financials

DKNG is not profitable and therefore has no P/E GAAP ratio. 

The same is true with its competitors Wynn Resorts (WYNN) and Caesars Entertainment (CZR). However, PENN Entertainment (PENN) trades at a P/E GAAP ratio of 21.4x, and MGM Resorts International (MGM) trades at 4.3x. 

A better measure for unprofitable companies is the price-to-sales (P/S) ratio. 

DKNG has a P/S of 3.86x, notably higher than its competitors. WYNN is at 1.97x, CZR is at 0.69x, PENN is at 0.68x, and MGM is at 1.15x. 

From a valuation perspective, DKNG is a terrible stock.

Investors hope the company can continue its explosive growth and justify its $6.7 billion market cap. 

Amazon recently announced it selected DraftKings as a sponsor and exclusive pregame and in-game odds provider for Thursday Night Football on Prime Video. In addition, Disney has a 4% stake in the company. 

But despite shares being down more than 70% year-to-date, you can make an honest argument that the stock is still rich. 

Profitability

  

Financials

DKNG delivers a gross profit margin of 33.1%, materially lower than its competition. For example, WYNN has a gross profit margin of 50.7% and MGM of 49.6%. 

Moreover, DraftKing’s actual profit margin is -99.1%, and its operating margin is -108.2%.

The firm’s return on equity of -78.4% and return on assets of -24.9% are abysmal. Both PENN and MGM have a positive return on equity and return on assets. And as mentioned earlier, DKNG burns -$772 million in cash from operations vs. PENN at $827 million and MGM at $1.94 billion. 

Growth

Financials

DKNG has experienced (YoY) revenue growth of 47.3%. 

However, it’s not significantly better than competitors, given how much money the company bleeds out. For example, PENN is at 26%, and MGM is at 87.6%. We would expect growth to continue as more states legalize gambling.  

 

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Our Opinion 2/10

Shares of DKNG have gotten hammered in 2022. 

However, it remains one of the most popular sports online sports betting platforms. As more states legalize sports betting, its business should grow. 

But it’s burning cash left and right. Moreover, this market does not like growth companies that don’t make money. 

This is not the time to be playing hero ball. 

Companies like PENN and MGM offer better values than DKNG. 

That’s why we’re currently passing on DKNG and not recommending the stock as a buy.

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