DraftKings Inc (DKNG) is a gaming and digital sports entertainment company with offerings that include sports betting, iGaming, and daily fantasy sports. It also engages in the development of casino gaming and sports betting software to facilitate online and retail sportsbook and casino gaming.
DraftKings divides its business pursuits into two business segments: Business-to-Business (B2B) and Business-to-Consumer (B2C), the latter of which generates the vast majority of the company’s revenue.
The main value for DKNG comes from its competitive positioning in the rapidly growing online gambling and U.S. sports betting industries, while also occupying a popular place in the larger fantasy sports industry.
In its most recent quarter, DKNG announced robust 175% revenue growth year-over-year while also significantly bolstering its balance sheet by issuing $1.1 billion in interest-free convertible notes due in 2028. Overall, in 2021 management is guiding for impressive 79% year-over-year revenue growth.
Long-term, management expects DraftKings to grow its $1.1 billion in estimated 2021 revenue by five to seven times, meaning that the company has a long growth runway ahead of it. (See DraftKings stock charts on TipRanks)
Valuation Metrics
While the company’s competitive positioning and lengthy growth runway bode very well for the stock, the main risk stems from its lofty valuation. The enterprise value is 16 times forward revenue, and the company is running up steep losses while bleeding cash.
Meanwhile, there is no clear path to profitability in the near-term. The positive side of this is that gross margins are rising year-over-year and are expected to hit 50% in 2022. As the company continues to scale, EBITDA and net income margins should turn positive and have high upside, given how high the gross margins are.
Wall Street’s Take
From Wall Street analysts, DKNG earns a Strong Buy analyst consensus based on 16 Buy ratings, 5 Hold ratings, and 0 Sell ratings in the past 3 months. Additionally, the average DraftKings price target of $68.93 puts the upside potential at 33.77%.
Summary and Conclusions
DKNG is riding strong momentum from rapidly growing demand for its online gambling and sports betting services. Furthermore, the company has an enormous growth runway in both businesses, thanks to the relative infancy of these industries and their broad popularity.
On top of that, the company’s sky-high and growing gross margins indicate that the company could become immensely profitable in the future, if it will be able to effectively scale and improve its operational efficiencies.
That said, investors should retain a healthy dose of caution before going all in on DKNG, given that it is richly valued and the company is not expected to become profitable anytime soon. Furthermore, management recently issued a significant amount of convertible notes, implying that shareholders could be significantly diluted moving forward as the company raises additional capital to keep its cash-burning business running.
While DKNG certainly has a lot going for it, and could one day be a cash printing machine, investors should still keep its significant risks and uncertainties in mind when making an investment decision about this stock.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
