Boston, Mass.-based digital sports entertainment and gaming company DraftKings Inc. (DKNG) has been making consistent product and services innovations and has also expanded in the non-fungible token (NFT) space. On October 18, Polygon announced a blockchain collaboration with DraftKings Marketplace for mainstream accessibility to support custom NFT drops along with secondary-market transactions.

However, DKNG’s shares have declined 14.3% in price over the past month and 21% over the past three months to close yesterday’s trading session at $41.08.

In addition, the stock has retreated 12.5% since the company reported its third-quarter earnings on November 5. The company’s losses increased significantly in the quarter, and it  continues to face stiff competition from players such as Caesars Entertainment, Inc. (CZR), MGM Resorts International (MGM), and Penn National Gaming, Inc. (PENN). Furthermore,  hedge fund’s interest in the stock has declined lately. So, DKNG’s near-term prospects look bleak.

Here are the factors that could shape DKNG’s performance in the coming months:

Pandemic-Led Surge in Online Gaming Could Decline

DKNG, the Mashantucket Pequot Tribal Nation, and Foxwoods Resort Casino announced the launch of online and mobile sports betting and online casino in Connecticut on October 19. Also that month, DKNG agreed to a deal with the National Hockey League (NHL) to become an Official Sports Betting, Daily Fantasy Sports, and iGaming Partner of the league in the United States.

However, with casinos operating at full or near-full capacity, the demand for online gambling services could decline. And  the gradual economic recovery and continuing efficacy  of COVID-19 vaccines and pills could also harm DKNG’s online business.

Weak Financials

DKNG’s top line declined 28.5% sequentially to $212.82 million for the third quarter, ended September 30, 2021. The company’s sales and marketing expenses increased 49.3% year-over-year to $303.66 million. Its loss from operations came in at $546.52 million, representing a 56.9% year-over-year rise. Also, while its net loss increased 37.8% year-over-year to $545.03 million, its loss per share was $1.35, up 21.6% year-over-year.

Poor Profitability

In terms of its trailing-12-month net income margin, DKNG’s negative 125.74% is lower than the 6.40% industry average. Also, the stock’s negative trailing-12-month ROCE, ROTC, and ROTA are lower than the 17.25%, 7.65%, and 6.25% respective industry averages.

Lofty Valuation

In terms of forward EV/S, DKNG’s 13.50x is 812.3% higher than the 1.48x industry average. Likewise, the stock’s 13.79x and 10.12x respective forward P/S and P/Bare higher than the 1.32x and 3.73x industry averages.

POWR Ratings Reflect Bleak Outlook

DKNG has an overall F rating, which equates 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, which is in sync with analysts’ expectations that its EPS will decline 13% year-over-year this year and remain negative.

The stock has an F grade for Value, which is consistent with its higher-than-industry valuation ratios, and an F grade for Quality, in sync with its lower-than-industry profitability ratios.

Moreover, DKNG has an F grade for Stability, consistent with its 1.91  beta.

DKNG is ranked last among  30 stocks in the Entertainment - Casinos/Gambling industry. Click here to see the additional POWR ratings for DKNG (Sentiment and Momentum).

Bottom Line

DKNG’s shares declined  significantly after the company reported its third-quarter earnings. The stock is currently trading below its 50-day and 200-day moving averages of $48.33 and $51.09, respectively, indicating a downtrend. Furthermore, it could continue  retreating in the near term as the economy gradually reopens and people opt for physical casinos over online services. So, we think DKNG is best avoided now.

How Does DraftKings (DKNG) Stack Up Against its Peers?

While DKNG has an overall POWR Rating of F, one could check out these other A-rated (Strong Buy) stocks within the Entertainment - Casinos/Gambling industry: Century Casinos, Inc. (CNTY), Golden Entertainment, Inc. (GDEN), and Accel Entertainment, Inc. (ACEL).

DKNG shares were trading at $41.19 per share on Thursday morning, up $0.11 (+0.27%). Year-to-date, DKNG has declined -11.53%, versus a 25.58% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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