The COVID-19 pandemic triggered a rally in gambling stocks as  stay-at-home mandates positioned people to spend more time on this kind of entertainment. Furthermore, the legalization of digital sports betting is an emerging trend in the United States.

Boston-based online sports platform, DraftKings Inc. (DKNG), which allows users to play daily fantasy games and win cash prizes, is taking advantage of the changing shift in attitude toward legalizing sports betting by many states.

DKNG stock has gained as much as 233% over the past year. However, its shares have been stumbling lately and have lost 10.3% over the past month. This is due primarily to rising investor concerns over evolving gambling and license granting laws in some states.

Let’s take a closer look at DKNG:

Gambling Legalization Spree

New York Governor Andrew Cuomo legalized mobile sports gambling in the state earlier this year, noting that New York has the potential to be the largest sports wagering market in the United States. Following this, Arizona signed a bill on April 15 that allows for a significant expansion of gambling, including sports betting under licenses issued to Native American tribes and professional sports teams.

Currently,  DKNG operates in 13 states in the U.S.  In fact, the Ohio Senate Select Committee on Gaming was  scheduled to  unveil its  bill to legalize sports betting in the state this morning.

Recent Corporate Developments

Last week, DKNG completed a first-of-its-kind content distribution, monetization and sponsorship agreement with a content company, Meadowlark Media,  and expanded its sports entertainment footprint. As part of the deal, Meadowlark and DKNG will distribute The Dan Le Batard Show with Stugotz and the Le Batard & Friends Network across a wide range of channels.

On April 15, DKNG became an official sports betting partner of the National Football League (NFL), thereby extending its current relationship as the NFL’s exclusive official daily fantasy partner. Furthermore,  DKNG inked a deal with mixed martial arts promoter UFC in March to become its official sportsbook and “daily fantasy partner” in the United States and Canada.

Financial Weakness

DKNG is scheduled to hold a conference call to discuss the financial results for the first quarter ended March 31, 2021 on May 7.

In the fourth quarter of 2020, DKNG’s total net revenues surged 146% year-over-year to $322 million. Its average monthly unique players (MUP) for its B2C segment jumped 44% versus the prior year to 1.5 million, reflecting strong unique payer retention and acquisition across DFS, OSB and iGaming. Its average revenue per MPU came in at $65, rising 55% year-over-year. However, DKNG reported a $1.95 per share loss, compared to a year-ago loss of $0.16 per share.

DKNG’s management is confident about  acquiring new customers this year and, thus, recently raised its 2021 revenue guidance from a $750 million – $850 million range to  $900 million – $1 billion. This equates to 40% to 55% year-over-year growth and a 19% increase versus  the midpoint of its previous guidance. Conversely, analysts expect DKNG’s EPS to deteriorate 75% year-over-year, in the first quarter.

Stretched Valuation

In terms of forward EV/Sales, DKNG is currently trading at 19.68x, 1,067% higher than the industry1.69x  average. DKNG is trading well above the industry average in terms of forward P/S as well (21.36x versus 1.43x).

Even though the stock has retreated 24.5% from its $74.38 52-week high, DKNG has a 7.55% short float, which indicates that the stock has been shorted.

POWR Ratings Indicate Bleak Prospects 

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

Our proprietary rating system also evaluates each stock based on eight different categories. Of these categories, DKNG has a Value Grade of F, consistent with its significantly higher-than-industry valuation ratios.

DKNG has an F grade for both Quality and Stability, reflecting  the company’s poor fundamentals and that the stock is more volatile compared than its industry peers. Of 31-stocks in the D-rated Entertainment – Casinos/Gambling industry, DKNG is ranked last.

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

If you’re looking for top-rated stocks in the Entertainment – Casinos/Gambling industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

DKNG has been one of the fastest growing online sports platforms and is attracting the spotlight because of the exclusive alliances it has been forming over the past year. However, DKNG operates  as a digital platform only and thus has a major disadvantage versus its peers which  have physical operations  as well. In addition,  investors must acknowledge that despite posting impressive  top-line growth over the past few years, DKNG is lacking profits. In fact, Wall Street analysts do not expect the company to be at breakeven for at least the next couple of years.

Hence, the stock’s incredible run over the past year has made it largely overvalued. Also,  in spite of a spree of gambling legalization, the U.S.  lacks a support system for gambling addicts and has yet to try to combat the problem. So, we think it’s wise to avoid betting on DKNG now.

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