DraftKings Inc. (DKNG) is a digital sports entertainment and gaming company. It provides multi-channel sports betting and gaming technologies, powering sports and entertainment for operators in 17 countries. In addition, the company operates iGaming through its DraftKings brand in five states and Golden Nugget Online Gaming, an iGaming product and gaming brand in three states.

Also, the company’s Sportsbook is live with mobile and retail betting operations in the United States in approximately 18 states. It also offers DraftKings Marketplace, a digital collectibles ecosystem designed for mainstream accessibility.

This month, Action Network reported that sports-betting firm DKNG was close to signing a partnership with Walt Disney Co’s ESPN. It is likely to be an exclusive agreement that would have shows and betting odds integrated into broadcasts of games and involve a sportsbook rebranding itself with the ESPN name. Shares of DKNG surged on the report.

However, DKNG has declined 55.1% in price year-to-date and 74.7% over the year to close the last trading session at $12.48. The stock is currently trading 75.3% below its 52-week high of $50.48, which it hit on October 26, 2021. Investors are increasingly shunning this loss-making growth stock amid an uncertain macro environment.

The sports-betting company reported an adjusted EBITDA loss of $118.13 million, widening 24% year-over-year. Also, the company’s net loss came in at $217.10 million. Moreover, DKNG’s cash burn remains a concern as there are worries if the company has sufficient cash flow to support its future growth.

Here is what I think could influence DKNG’s performance in the upcoming months:

Deteriorating Financials

DKNG’s operating loss came in at $308.92 million for the fiscal 2022 second quarter that ended June 30, 2022. The company’s adjusted EBITDA loss widened 24% year-over-year to $118.13 million. Its net loss came in at $217.10 million and $0.50, respectively.

In addition, the company’s current assets came in at $2.14 billion for the quarter that ended June 30, 2022, compared to $2.75 billion as of December 31, 2021. Also, its total liabilities and stockholder’s equity came in at $4.15 billion, compared to $4.10 billion for the same period.

Weak Growth Prospects

Analysts expect DKNG’s revenues to increase 97.6% year-over-year to $434.29 million in the fiscal 2022 third quarter (ended September 2022). However, the company’s loss per share for the same quarter is expected to come in at $1.06.

Furthermore, the company’s loss per share for the fiscal 2022 and 2023 is expected to come in at $3.23 and $2.24, respectively. Also, Street expects its EPS to decline 6.8% per annum over the next five years.

Weak Profitability

DKNG’s trailing-12-month gross profit margin of 33.10% is 9.1% lower than the 36.42% industry average. And its trailing-12-month EBIT margin of negative 108.32% compares to the 8.14% industry average. Likewise, the stock’s EBITDA margin of 99.56% compares to the industry average of 99.56%.

In addition, DKNG’s trailing-12-month net income margin of negative 99.15% compares to the 5.69% industry average. The stock’s ROCE, ROTC, and ROTA are negative 78.41%, 32.07%, and 37.46% compared to the industry averages of 14.93%, 6.91%, and 5.14%, respectively. Its trailing-12-month CAPEX/Sales of 1.54% is 48.9% lower than the 3.01% industry average.

Frothy Valuation

In terms of forward EV/Sales, DKNG’s 2.53x is 144.2% higher than the 1.04x industry average. Its 2.63x forward Price/Sales is 235.6% higher than the 0.78x industry average. Likewise, the stock’s forward Price/Book of 4.73x is 102.8% higher than the 2.33x industry average.

POWR Ratings Reflect Bleak Prospects

DKNG’s overall F rating translates to a Strong Sell in our POWR Ratings 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 an F grade for Quality, in sync with its lower-than-industry profitability metrics.

In addition, the stock has an F grade for Stability. The stock’s beta of 2.19 justifies the Stability grade.

DKNG is ranked #26 out of 27 stocks in the D-rated Entertainment-Casino/Gambling industry. 

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

Bottom Line

DKNG’s stock has been beaten down in the recent market turbulence, declining more than 50% year-to-date. While the sports-betting company reported a 57% year-over-year increase in revenue for the second quarter, it didn’t translate to bottom-line performance. Moreover, analysts seem bearish about its earnings growth prospects.

Given DKNG’s elevated valuation, poor profitability, and bleak growth prospects, we think the stock might be best avoided now.

How Does DraftKings Inc. (DKNG) Stack Up Against Its Peers?

DKNG has an overall POWR Rating of F. So, one might want to consider investing in other Entertainment-Casino/Gambling stocks with a B (Buy) rating, such as Boyd Gaming Corporation (BYD), Accel Entertainment, Inc. (ACEL), and Century Casinos, Inc. (CNTY).

DKNG shares were trading at $13.21 per share on Monday afternoon, up $0.73 (+5.85%). Year-to-date, DKNG has declined -51.91%, versus a -21.91% 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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