In this piece, I evaluated prominent entertainment stocks, DraftKings Inc. (DKNG) and Inspired Entertainment, Inc. (INSE), to determine which is worth investing in. After comparing these stocks fundamentally, I think INSE might be a superior choice for the reasons discussed throughout this article.
Before comparing these stocks, let’s see what’s happening in the entertainment space.
The entertainment industry has seen rapid globalization, with content being created and consumed through remote technology platforms. Streaming services and digital distribution platforms have enabled content creators to reach wider audiences.
The global entertainment market is expected to grow at a CAGR of 11% until 2032.
The unprecedented growth of online gambling activities, such as online casinos and betting, has further propelled the industry’s growth.
The implementation of AR and VR technologies provides online casinos with various options for improving and developing their gaming offerings. The global online gambling market is expected to reach $213.58 billion by 2028, growing at a CAGR of 12.6%.
INSE is a clear winner in terms of price performance, with a 151.1% gain over the past year compared to DKNG’s 38.4% decline. Also, INSE gained 227.6% year-to-date compared to DKNG’s 40.5% decline.
Here are the reasons why I think INSE might perform better in the near term:
On October 31, 2023, DKNG announced it had reached an agreement in principle, subject to licensing and regulatory approvals, with the Passamaquoddy Tribe paving the way for the launch of its online sportsbook in Maine.
Conversely, on November 2, 2023, INSE announced an agreement with Caesars Digital. The new partnership is centered around the creation of bespoke Hybrid Dealer products for Caesars Palace Online Casino and Caesars Sportsbook & Casino, utilizing groundbreaking Inspired technology that seamlessly integrates Virtual CGI, green screen technology, and footage of real dealers to create an unparalleled gaming experience.
On October 9, 2023, INSE announced that they had signed an agreement with the National Basketball Association (NBA), securing the rights to develop Virtual Sports games centered around the world’s premier professional basketball league’s archived footage.
Recent Financial Results
During the fiscal third quarter ended September 30, 2023, DKNG’s revenue came in at $789.96 million. Also, its loss from operations came in at $286.59 million, and net loss attributable to common shareholders came in at $283.10 million. Also, its adjusted loss per share stood at $0.35.
On the contrary, INSE’s total revenue increased 6% year-over-year to $27.10 million for the second quarter that ended June 30, 2023. Its adjusted EBITDA rose marginally from the year-ago quarter to $26.20 million. Its net income stood at $4.10 million, and adjusted net income per share came in at $0.18.
Past And Expected Financial Performance
Over the past three years, DKNG’s revenue grew at 98.1% CAGR. Analysts expect DKNG’s revenue to grow by 65.4% this year and 48.6% in the current quarter ending December 2023. However, its EPS is expected to be negative $1.47 this year and negative $0.35 in the next quarter ending March 2024.
Conversely, INSE’s revenue increased at a CAGR of 23.1% over the past three years. Its revenue is expected to increase 10.5% this year and marginally in the current quarter ending September 2023. Its EPS is expected to be $0.68 this year and $0.32 in the to-be-reported quarter (ended September 2023).
DKNG’s forward P/S multiple of 4.69 is higher than INSE’s 0.63. Additionally, DKNG’s forward EV/Sales multiple of 4.76x is higher than INSE’s 1.46x.
Thus, INSE is relatively more affordable.
DKNG’s trailing-12-month gross profit margin of 37.35% is lower than INSE’s 72.69%. In addition, DKNG’s trailing-12-month EBIT margin of 16.24% is lower than INSE’s 119.32%.
Thus, INSE is more profitable.
DKNG has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, INSE has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different 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 for Quality. Its trailing-12-month CAPEX/Sales of 0.98% is 68.9% lower than the industry average of 3.17%. Its trailing-12-month levered FCF margin of 1.76x is 67.1% lower than the industry average of 5.34%.
On the other hand, INSE has a B grade for Quality. Its trailing-12-month CAPEX/Sales of 6.34% is 100.1% higher than the industry average of 3.17%. Its trailing-12-month levered FCF margin of 6.69% is 25.2% higher than the industry average of 5.34%.
Moreover, DKNG has a D grade in Value. Its forward P/S of 4.69x is 474% higher than the industry average of 0.82%. Its forward P/B multiple of 17.52 is 646.7% higher than the industry average of 2.35x.
On the other hand, INSE has an A grade in Value. Its forward P/S of 0.63x is 23.1% lower than the industry average of 0.82%.
Among the 25 stocks in the Entertainment – Casinos/Gambling industry, DKNG is ranked last, while INSE is ranked #3.
The shift in consumer behavior has led to the proliferation of on-demand services, personalized content recommendations, and user-generated content platforms in the entertainment industry. Industry players like DKNG and INSE are well-positioned to capitalize on these industry tailwinds.
However, given DKNG’s relatively weak financial performance and low profitability, it might be best to sell the stock. Hence, INSE could be a wise portfolio addition now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated Entertainment – Casinos/Gambling industry stocks here.
What To Do Next?
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INSE shares were unchanged in premarket trading Friday. Year-to-date, INSE has declined -40.57%, versus a 19.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...
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