Sports betting operator DraftKings Inc. (DKNG) delivers digital sports entertainment, sports betting, and iGaming products . The company went public on April 24, 2020, through a reverse merger with blank-check company Diamond Eagle Acquisition Corp. Its recent launch of an NFT ecosystem—DraftKings Marketplace—to give sports fans access to digital collectibles from top athletes has driven its shares up 10.2% year-to-date. But DKNG’s stock price has declined 9.1% over the past month and 23% over the past six months. Closing yesterday’s trading session at $51.33, its stock is trading 31% below its 52-week high of $74.38.
Moreover, DNG is currently trading lower than its 50-day and 200-day moving averages of $54.15 and $55, respectively, which indicates a downtrend. Although the expansion of its online Sportsbook in new markets could help grow its customer base and further improve fan engagement, several class-action lawsuits filed against the company could foster bearish investor sentiment.
Further, its proposed takeover of British gambling firm Entain, which already has a joint venture with MGM Resorts International (MGM), requires MGM’s consent. The uncertainty surrounding the deal could lead to the stock experiencing more dramatic price swings in the near term.
Here’s what could influence DKNG’s performance in the upcoming months:
Class Action Lawsuits
In July, a lawsuit was filed against DKNG alleging violations of securities laws. According to the plaintiff, the DKNG made materially false and misleading statements related to its merger with SBTech and its operations. Also, this month, securities class action lawsuits were filed against the sports betting firm by Levi & Korsinsky, LLP, the Schall Law Firm, Jakubowitz Law, and several other law firms on behalf of shareholders for allegedly misleading public statements related to its merger. These lawsuits could rattle investors leading to a further decline in DKNG’s stock price.
Uncertain $22 Billion Deal
This month, DKNG made a $22.4 billion acquisition proposal to U.K. online sports betting company Entain, to be paid largely in stock. This proposal comes after the British firm rejected an all-stock offer worth $11 billion from MGM Resorts earlier this year. However, since Entain and MGM already have an online sports betting collaboration called BetMGM in the United States, which controls approximately 21% of the market, versus DKNG's 17%, any deal involving DKNG and Entail would need MGM’s consent. In a recent statement in response to the potential deal, MGM said, “Any transaction whereby Entain or its affiliates would own a competing business in the U.S. would require MGM’s consent.”
Unstable Financials
During the second quarter, ended June 30, 2021, DKNG reported $297.61 million in total revenue, representing a 319.6% year-over-year increase. But the company’s loss from operations rose 100.4% from its year-ago value to $321.6 million. In addition, DKNG’s net loss stood at $305.53 million, while its comprehensive loss came in at $297.83 million for the quarter. Also, it reported a $0.76 loss per share.
Its 3.5% trailing-12-month levered free cash flow margin is 52.4% lower than the 7.4% industry average. In addition, DKNG’s 0.3% asset turnover ratio is 70.7% lower than the 1.1% industry average. Moreover, its net income margin, EBITDA margin, and ROE are negative 121.2%, 104.6%, and 58.7%, respectively.
Premium Valuation
In terms of forward Price/Sales, DKNG is currently trading at 16.19x, which is 1,214.1% higher than the 1.23 industry average. In addition, its 18.30 trailing-12-month EV/Sales ratio is 1,074.5% higher than the 1.56 industry average. Also, DKNG’s 12.04 forward Price/Book multiple compares with the 3.49 industry average.
POWR Ratings Reflect Bleak Prospects
DKNG has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct 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 Growth. This is reflective of the stock’s inadequate financials and weak growth potential.
The company has an F grade for Value and Quality, consistent with its negative net income margin and higher-than-industry valuation multiples.
Beyond the grades that I’ve highlighted, one can check out additional DKNG ratings for Sentiment, Stability, and Momentum here. DKNG is ranked #30 of 31 stocks in the C-rated Entertainment – Casinos/Gambling industry.
Bottom Line
Even though DKNG’s advancement in the NFT space and its expansion in the online sports betting market could generate additional revenues for the company, its substantial losses could put downward pressure on its stock. Furthermore, given the uncertainty surrounding its deal with a British sports betting firm and the ongoing challenges the company is facing, investors could remain anxious. So, we think DKNG’s stock is best avoided now.
How Does DraftKings Experience (DKNG) Stack Up Against its Peers?
While DKNG has an F (Strong Sell) rating in our proprietary rating system, one might want to consider taking a look at its industry peer, Golden Entertainment, Inc. (GDEN), Boyd Gaming Corporation (BYD), and Century Casinos, Inc. (CNTY), which have an A (Strong Buy) rating.
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DKNG shares fell $0.14 (-0.27%) in premarket trading Monday. Year-to-date, DKNG has gained 10.24%, versus a 19.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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