Digital sports entertainment and gaming company DraftKings Inc. (DKNG) recently launched its online sportsbook and casino products in Ontario, Canada, to further expand its business. It also acquired Golden Nugget Online Gaming, Inc. to broaden its reach into new customer segments and enhance the combined company’s iGaming product offerings.

However, the high costs of acquiring customers led to DKNG generating massive losses. The stock has lost 22.3% over the past three months and 78.3% over the past nine months to close yesterday’s trading session at $13.82. In addition, it is currently trading 78.6% below its 52-week high of $64.58, which it hit on September 8, 2021. So, DKNG’s near-term prospects look bleak.

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

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For the fiscal third quarter ended March 31, 2022, DKNG’s revenue surged 34% year-over-year to $417 million. However, its adjusted EBITDA loss for the quarter increased 107.9% year-over-year to $289.51 million. Also, its net loss came in at $467.69 million, representing a 35% year-over-year increase.

Low Profitability

In terms of the trailing-12-month asset turnover ratio, DKNG’s 0.34% is 67% lower than the industry average of 1.03%. Likewise, its trailing-12-month CAPEX/Sales of 1.58% is 45.5% lower than the industry average of 2.90%. Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the industry averages of 17.02%, 7.42%, and 5.69%, respectively.

Stretched Valuation

In terms of forward P/S, DKNG’s 2.86x is 200.1% higher than the industry average of 0.95x. Likewise, its forward P/B of 7.01x is 176.6% higher than the industry average of 2.53x. Moreover, the stock’s forward EV/S of 2.65x is 138.2% higher than the industry average of 3.84x.

Unfavorable Analyst Estimates

Analysts expect DKNG’s EPS to decrease 9.2% for the quarter ending June 30, 2022. Also, its EPS is expected to remain negative in the current quarter, next quarter, current year, and next year. Moreover, its EPS is expected to decline at a rate of 6.8% per annum over the next five years.

POWR Ratings Reflect Bleak Prospects

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

Our proprietary rating system also evaluates each stock based on eight different categories. DKNG has a D grade for Quality, in sync with its lower-than-industry profitability ratios.

The stock has an F grade for Stability, consistent with its beta of 2.06. In addition, DKNG has a D grade for Value, in sync with its higher-than-industry valuation ratios.

DKNG also has a D grade for Sentiment. This is justified as analysts expect its EPS to decline in the near term.

DKNG is ranked last out of 29 stocks in the D-rated Entertainment – Casinos/Gambling industry. Click here to access DKNG’s ratings for Growth and Momentum.

Bottom Line

DKNG is currently trading below its 50-day and 200-day moving averages of $14.81 and $30.10, respectively, indicating a downtrend. As the stock looks overvalued at the current price level, it is best avoided now.

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

While DKNG has an overall POWR Rating of F, you might want to consider investing in the following Entertainment – Casinos/Gambling stocks with an A (Strong Buy) rating: Century Casinos, Inc. (CNTY), Accel Entertainment, Inc. (ACEL), and Boyd Gaming Corporation (BYD).

DKNG shares closed at $13.10 on Friday, down $-0.72 (-5.21%). Year-to-date, DKNG has declined -52.31%, versus a -17.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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