Is DraftKings a Good Pick for Investors?

DraftKings (DKNG) used to be an investor favorite just a few months back. However, the stock has lost most of its value since its 2021 highs.

It used to trade at $72 levels in March 2021. Today, it is at $20 levels. However, the hoopla over the online gaming industry is just beginning and the fact remains that the market might be on the cusp of several ‘boom’ years. I’m bullish.

DraftKings is an American digital sports entertainment and gaming company. It offers sports-related content to its customers, and provides gambling enthusiasts convenient ways to wager.

People can visit the DraftKings website and wager on daily fantasy sports, bet on their favorite team in the mobile sportsbook, or simply gamble on casino-style games like blackjack. Presently, the company operates across 17 countries and 18 states in the United States including New York.

As the online gaming industry grows, DraftKings stock too will gain significant momentum. Moreover, the approval of Online Sports Betting and iGaming across more locations in the United States and Canada bodes well for the stock. 

Online sports betting and gambling are high growth-oriented markets and DraftKings has been growing aggressively by striking deals with leagues, networks, and individual teams.

The company has moved beyond online gaming and has struck up partnerships with OneTeam Partners and the NFL Players Association to launch its first gamified non-fungible tokens (NFTs) through the DraftKings Marketplace.

Mike Hickey at Benchmark company is also optimistic about DraftKings stock and affirmed a Buy rating on it.

He had stated, “We suspect the market is effectively pricing concerns over the Omicron coronavirus variant and potential influence on the economy and sports, an inflation impact on economic growth and consumer discretionary spend, and a recent hawkish pivot from the Federal Reserve that includes and accelerated view on interest rate increases, which can have an exaggerated impact on high-multiple growth companies.”

Huge Room for Growth

DraftKings is relatively a new company and still has ample room to grow more. For example, its mobile sportsbook is now available in 15 states in the United States, which means it has served only 29% of the U.S. population.

Its iGaming product on the other hand has even more room for growth, as the company is providing it to only 11% of the United States population.

Moreover, online gambling is building up popularity slowly. Previously for decades, people who sought entertainment through gambling had to travel for hours to physical destinations where the activity was permitted.

Further, during the pandemic, this industry faced a massive surge in demand across all regions. The global online gambling market was valued at $66.72 billion in 2020, and this market is expected to reach $158.2 billion by 2028, growing at a CAGR of 11.4%.

Growing Revenues

DraftKings has been growing its revenues. From 2018 to 2020 its revenue grew from $226 million to $615 million, along with improving the growth rate every year.

Also, within the first nine months of 2021 itself it booked $823 million in revenues thereby growing its revenue by more than 150% year-over-year.

Despite such revenue growths DraftKings is yet to turn into a profit-making company because of the string of acquisitions it has been undergoing these days.

These increasing expenses pushed the company’s losses for the period to $1.2 billion, up from about $1 billion recorded a year ago. However, all these expenses are essential for the company’s growth, and when DraftKings reaches maturity all these investments are going to be worthwhile.

DKNG stock holds a Moderate Buy consensus rating on TipRanks, based on 10 Buys, 10 Holds, and one Sell assigned in the past three months.

The average DraftKings price target of $44.53 suggests 122.3% upside potential.

Asset-Light Business Model

One of the biggest strengths of DraftKings is its asset-light business model.

Traditional casinos require tons of money for their buildings, as well as maintenance. Moreover, they also need thousands of staff to serve their guests.

DraftKings can save on these costs easily, and can therefore potentially earn significantly higher profit margins once it reaches maturity.

Investing in gambling companies is a risky affair because of regulatory concerns. DraftKings, being a loss-making company, might not come off as an appealing one to the investors. However, DraftKings does have a lot of growth potential over the coming years.

Considering its accelerating revenue growth in an expanding market as well as the superior gaming business model, the stock looks like an absolute bargain at its current price.

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