Don’t Gamble on DraftKings

DraftKings (DKNG) did the unthinkable – they circumvented Federal gambling laws by calling sports betting ‘a game of skill.’

So, how is it they burn cash every quarter?

Normally, we wouldn’t bother discussing a company this bad.

However, financial pros, and especially retail, search this stock out constantly.

In fact, it’s the most searched casino and gambling stock by financial pros by a mile.

And that’s a problem, because this company looks like it’s headed for a buyout or bankruptcy.

DraftKings’ Business

DraftKings is a digital sports entertainment and gaming company that operates in the United States and Canada. They offer daily fantasy sports games as well as traditional sports betting. The company has partnerships with major sports leagues including the NFL, MLB, and NBA.

In 2017, the company attempted to merge with its largest competitor but was blocked by the FTC.

Draftkings went public in April 2020 and has become a mainstay in sports betting.

Yet, the once monopolistic hold it had on sports betting is under threat from state laws and competitors.

The company spends a massive amount of money on marketing, using promotions to lure in customers, anywhere from $130-$200 per unique user, and only gets them to spend around 2x that amount.

Sure, they grow users like there’s no tomorrow. But how long can they keep it up?

Source: DraftKings Q1 2023 Presentation

The latest quarterly results showed 2.8 million users, double what they had in Q3. Yet, the average revenue per user was $92, down from +$100 for every quarter in 2022 except Q1.

Financials

Source: Stock Analysis

DraftKings has never turned a profit. They were briefly operating cash flow positive in Q3 of 2022, the first time since Q3 of 2020. But they’ve always burned cash on an annual basis.

Right now, that’s coming in around $500 million each year.

The company has $1.3 billion in total debt and $215 million in net debt, of which $1.1 billion is cash.

Hemorrhaging money, the company was forced to issue a ton of stock in 2020, followed up by a massive $1.3 billion debt load in 2021.

Given their forecast doesn’t talk about positive cash flow in 2023, they’ll likely need to raise more cash in the near future.

Valuation

Source: Seeking Alpha

To provide a proper point of comparison, we stacked DKNG up against similar gaming and casino stocks.

Rather than belabor the point, we’ll just state the obvious – all the others turn a profit. And Wynn Resorts (WYNN), a company dependent upon the Chinese economy, is expected to be nicely cash flow positive in 2023.

Growth

Source: Seeking Alpha

DraftKings certainly knows how to grow sales. But that’s about it. None of its peers come close to the same rates. But MGM, a key competitor in the sports betting market, is delivering some healthy numbers.

Profitability

Source: Seeking Alpha

And then we come to profitability, something DraftKings has yet to find.

GM, for example, isn’t roses across the board. But again, its EBIT is expected to turn positive in 2023.

Our Opinion 0/10

If we had one word to describe DraftKings, it would be a contraction – Don’t.

The company bleeds money with no end in sight. Things aren’t going to get any easier.

Yet, management seems to think cash flow isn’t a problem.

Sure, the stock could triple or quintuple on a turnaround. But we aren’t about gambling here. We’re about investing.