DraftKings Inc. (DKNG), a leading digital sports entertainment and gaming company, reported mixed second-quarter 2024 performance. DraftKings posted revenue of $1.10 billion, up $230 million from the same period of 2023. Despite an impressive year-over-year growth, the company’s revenue fell short of analysts’ estimate of $1.12.

DKNG reported an adjusted earnings per share of $0.22, compared to the consensus estimate of $0.19. The online sports betting company raised its 2024 revenue guidance midpoint to $5.15 billion. However, DraftKings lowered its full-year adjusted EBITDA guidance midpoint from $500 million to $380 million.

Moreover, investors are shifting away from growth-dependent stocks like DKNG due to a renewed focus on macroeconomic risk factors. The recent jobs report indicated that hiring slowed significantly in July and unemployment rose to the highest in almost three years, increasing concerns of an economic slowdown and fears that the Fed waited too long to cut interest rates.

The Labor Department reported that employers added only 114,000 jobs in July, while the unemployment rate increased to 4.3% from 4.1% in June. That represents a surprising weakening in the labor market that had previously remained resilient despite the Fed’s aggressive interest rate hikes in 2022 and 2023.

DraftKings’ elevated valuation may expose the company to downside risk if macroeconomic concerns persist and continue to influence the broader market. Also, the company faces several challenges, including legal proceedings and the discontinuation of certain product offerings.

In July 2024, DKNG announced shutting down its non-fungible token (NFT) business citing legal developments. A federal judge allowed a class action lawsuit against DraftKings to move forward after finding plaintiffs “plausibly pled’ DKNG’s NFTs were unregistered securities, as reported by Westlaw.

“After careful consideration, DraftKings has decided to discontinue Reignmakers and our NFT Marketplace, effective immediately, due to recent legal developments. This decision was not made lightly, and we believe it is the right course of action,” the sports gambling company said in an email to customers.

Shares of DKNG have plunged 20.5% over the past month and 31.6% over the past year to close the last trading session at $29.85.

Let’s discuss several other factors that could influence DKNG’s performance in the upcoming months:

Mixed Financials

For the second quarter that ended June 30, 2024, DKNG’s revenue increased 26.2% year-over-year to $1.10 billion. However, its cost of revenue grew 30% from the year-ago value to $663.41 million. The company reported a loss from operations of $32.39 million.

In addition, the company’s adjusted EBITDA came in at $127.97 million, up 75.4% from the prior year’s quarter. DraftKings’ adjusted earnings per share rose 57.1% year-over-year to $0.22.

Mixed Analyst Estimates

Analysts expect DKNG’s revenue for the third quarter (ending September 2024) to grow 40% year-over-year to $1.11 billion. However, the company is expected to report a loss per share of $0.40 for the current quarter.

Additionally, DraftKings’ revenue for the fiscal year 2024 (ending December 2024) is anticipated to grow 39% year-over-year to $5.09 billion. However, the company is expected to report a loss per share of $0.28 for the ongoing year.

Dim Profitability

DKNG’s trailing-12-month EBIT margin of negative 10.9% compared to the 7.82% industry average. Its trailing-12-month net income margin of negative 9.45% compared to the industry average of 4.62%. Likewise, its trailing-12-month CAPEX/Sales of 0.39% is 87.2% lower than the industry average of 3.03%.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 35.09%, negative 11.79%, and negative 9.64% are unfavorably compared to the industry averages of 11.41%, 6.14%, and 4.19%, respectively.

POWR Ratings Reflect a Bleak Outlook

DKNG’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DKNG has a D grade in Value, consistent with its lower-than-industry valuation. The stock has a D for Stability, justified by its 24-month beta of 2.91.

Within the Entertainment-Casinos/Gambling industry, DKNG is ranked #24 out of 25 stocks.

Beyond what I have stated above, we have also given DKNG grades for Value, Quality, and Sentiment. Get all DKNG ratings here.

Bottom Line

DKNG surpassed earnings expectations and missed analysts’ revenue forecast in the second quarter of fiscal 2024. The online sports betting company increased its full-year revenue guidance but lowered significantly its adjusted EBITDA outlook. Lingering macroeconomic concerns and legal challenges are eroding investor confidence in DKNG’s stock.

Considering DraftKings’ deteriorating financials, elevated valuation, and bleak growth prospects, it would be wise to avoid this stock now.

Stocks to Consider Instead of DraftKings Inc. (DKNG)

Given its uncertain short-term prospects, the odds of DKNG outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Entertainment-Casinos/Gambling industry instead:

PlayAGS, Inc. (AGS)

MGM China Holdings Ltd. (MCHVY)

Accel Entertainment, Inc. (ACEL)

To explore more A and B-rated gambling stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

DKNG shares rose $0.05 (+0.17%) in premarket trading Tuesday. Year-to-date, DKNG has declined -15.32%, versus a 12.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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