DraftKings Stock: An Ace In the Hole?

DraftKings (NASDAQ: DKNG) stock has pulled back considerably since its post-IPO run-up.

Hence, the stock looks significantly more attractive than it did a few months ago. Moreover, with incredible upside potential over the next couple of years, I remain bullish on DKNG stock.

The iGaming giant has been rocking it with its fundamentals of late. Its top line has grown by triple digits this year, with plenty of room to grow in the coming years. Moreover, it expects to become profitable within two to three years.

DraftKings is a platform that offers users the opportunity to play daily fantasy sports, bet on their favorite sporting events in real-time with live scores and stats, and access games for online casinos.

The firm designs software for online casinos and brick & mortar locations to offer more opportunities than ever before.

Solid Q3 Results

DraftKings continues to grow its revenues at an impressive pace with every passing quarter. The third quarter was no different, as it notched up 60% year-over-year growth in sales to $213 million. Though revenues missed analyst expectations, they aligned with the company guidance. Overall though, it was another remarkable performance.

Its B2C segment generated a whopping $189 million during the quarter, an 82% improvement from the prior-year period. However, its growth was offset by losses in its B2B segment.

Turning our attention to some of its key metrics, we see how the sports-gaming company has come of age. Retention, acquisition, and engagement numbers exceeded expectations, and set it up for a more robust performance during the fourth quarter.

Typically, the NFL season weighs heavily on the company’s third and fourth quarters. Hence, the outperformance during the quarter was somewhat predictable. DraftKings expects to close out the year with aplomb, posting revenue growth of over 90% from the prior-year period.

Furthermore, the company’s average revenue per unique monthly payer rose to $47, representing 38% growth from the same quarter last year. Considering the headwinds from fewer sports activities during the quarter, these numbers are tremendous. Basketball and hockey were a major part of last year’s third quarter, negatively impacting results.

Additionally, DraftKings Monthly Active Users also increased by double digits to 1.3 million. This included a record-breaking September, where its users topped 2.1 million.

Overall, the company will continue to grow quickly as it expands into new states and improves its product offerings.

Cash Flows and Guidance

DraftKings wrapped up the third quarter, boasting impressive financial flexibility. At the conclusion of the quarter, it had a whopping $2.4 billion in its cash till. Additionally, its total liabilities equaled $2.18 billion. Moreover, its free cash flows for the third quarter ended at an impressive $89 million.

Looking ahead, the company projects 2022 revenues to fall between $1.7 billion to $1.9 billion, representing a 43% growth from the prior-year period. iGaming revenues are expected to continue growing at a healthy pace, a trend which should accelerate in the fourth quarter.

Moreover, DraftKings expects its fourth-quarter EBITDA loss to be lower than 50% of its third-quarter loss. This is a significantly wider EBITDA loss than its previous estimates. However, those estimates did not include the new states it added during the quarter.

Risks

Nevertheless, there are certain risks with investing in DraftKing, which investors need to consider. Foremost, you have high acquisition costs that continue to hamper its profitability.

For instance, DraftKing’s customer acquisition cost in 2020 was $371. Hence, if it continues on such a path, it will be extremely difficult for the company to break even in the next couple of years.

However, DraftKings is looking to reduce its acquisition costs through effective cross-selling. Moreover, it has opened multiple new business lines to curb costs, and cross-sell those users into its iGaming segment.

Furthermore, DraftKings is likely to encounter a lot more competition from brick-and-mortar gambling. It appears that the world has gotten some grip on the coronavirus.

Moreover, more than 60% of the population in the U.S. is already vaccinated. Naturally, with new mutations such as Delta and Omicron, lockdowns may always be on the cards.

However, we see that most governments have become anti-lockdown and are looking to enforce vaccine mandates instead. Hence, businesses such as the Red Rock Resorts (RRR) and The Las Vegas Sands (LVS) will be back to reclaim their positions in 2022.

Regulatory concerns will also persist for the foreseeable future. Of the four top states, the bulk of its revenues comes from New York. However, 50% of its revenues from the state are gone in taxes.

California and Texas have banned online sports betting. As it stands, the company is heavily reliant on New York, which takes away a hefty chunk of its revenues.

Wall Street’s Take

Turning to Wall Street, DKNG stock is a Moderate Buy. Out of 18 analyst ratings, there are eight Buys, nine Holds, and one Sell rating.

The average Draft Kings price target is $51.13, implying 79.7% upside potential. Analyst price targets range from a low of $34 per share to a high of $76 per share.

Conclusion

DraftKings has come of age in the past couple of years due to the pandemic-led tailwinds, and its solid execution. Its sparkling fundamentals are a testament to its solid performance so far. Moreover, it has delivered across virtually every core metric and will likely continue its stellar run into next year.

However, it has its fair share of risks which have invariably weighed down the stock. Naturally, with the coronavirus tailwinds fading away, brick-and-mortar gambling companies will chomp away at its market share. Moreover, acquisition costs continue to erode its profitability and remain incredibly high.

Nevertheless, DraftKings sits at a highly attractive valuation considering the massive opportunity ahead. It has the potential of being the leader in the fast-growing iGaming space, and is growing its business at a breathtaking pace. It continues to acquire customers significantly faster than expected in its newly added states, which are likely to pay back within a couple of years.

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Disclosure: On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.