Online sports and entertainment company DraftKings Inc. (DKNG), which is headquartered in Boston, Mass., reported impressive second-quarter results on August 6. DKNG’s revenues increased 320% year-over-year to $298 million for the quarter ended June 30. This can be attributed to a 281% rise in its monthly unique players for the B2C segment. 

Following the earnings release, shares of DKNG gained 2.2% intraday to close Friday’s trading session at $51.59.

However, the company has yet to generate a profit. In its fiscal second quarter its loss from operations and net loss came in at $302.93 million and 305.53 million, respectively. Its adjusted loss before interest, taxes, depreciation, and amortization stood at $95.30 million, up 59.3% from the same period last year. Furthermore, analysts expect DKNG’s EPS to remain negative until at least 2022.

Here’s what could shape DKNG’s performance in the near term:

Limited Market Share

As of the close of the second quarter, ended June 30, DKNG’s online betting platform was active in only 12 states in the United States, while its iGaming platform was available in only four states. Though several states have introduced legislation to legalize sports betting and expand existing sports wagering networks  this year, it might take a while for sports betting to gain popularity nationwide.

Lawsuits

Several lawsuits in connection to DKNG’s merger with SBTech Global Limited have been filed by law firms on behalf of DKNG shareholders. The  lawsuits allege that DKNG has made several false and/or misleading statements causing shareholders to suffer material losses. DKNG also allegedly failed to disclose that its subsidiary SBTech has a history of unlawful operations at the time of its listing. As a result, DKNG’s revenues were allegedly driven by black-market gaming derived from illegal contracts and hence are unsustainable and subject to regulatory and criminal risks. In addition, the lawsuits allege that the company’s benefits from its  business combination with SBTech are overstated.

Stretched Valuation

In terms of forward Price/Book ratio, DKNG is currently trading at 11.90, which is 224.6% higher than the 3.67 industry average. The stock’s forward Price/Cash Flow and EV/Sales multiples of 16.12 and 14.96, respectively, are significantly higher than the  3.67 and 1.47 industry averages.

POWR Ratings Reflect Bleak Prospects

DKNG has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DKNG has an F grade  for Value and Quality, consistent with its higher-than-industry valuation and negative profitability. Its negative 180.07% net income margin is significantly lower than the 5.65% industry average.

Of the 31 stocks in the D-rated Entertainment – Casinos/Gambling industry, DKNG is ranked #30.

Beyond what we’ve stated above, we have rated DKNG for Growth, Sentiment, Stability, and Momentum. Get all DKNG ratings here.

View the top-rated stocks in the Entertainment – Casinos/Gambling industry here.

Bottom Line

DKNG bypassed the traditional listing process by merging with special purpose acquisition company Diamond Eagle Corporation in April 2020. Although the company garnered popularity last year as people took up alternate hobbies amid social distancing and remote lifestyles, sports betting remains illegal in several states. Also, multiple class-action lawsuits filed against DKNG raise concerns regarding its future growth prospects and financial stability. Given this backdrop, we think the stock is best avoided now.

DKNG shares were trading at $51.56 per share on Monday afternoon, down $0.03 (-0.06%). Year-to-date, DKNG has gained 10.74%, versus a 19.08% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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