DraftKings Inc. (DKNG) in  Boston, Mass., is a digital sports entertainment and gaming company in the United States. The company provides users with daily sports, sports betting, and iGaming opportunities. With sports betting legalized in several states, DKNG has been gaining traction. “We’ve seen just massive, massive levels of engagement,” boasted Bill Miller, president and CEO of the American Gaming Association. But the booming online sports gambling sector is becoming increasingly competitive.

In November, DKNG reported a 60% year-over-year increase in revenues to $213 million for its fiscal third quarter. The company reported solid growth in its monthly unique players also. However, its revenues missed consensus estimates by $24.90 million. Jason Park, DraftKings’ Chief Financial Officer, explained the lower-than-expected results as primarily due to unexpected NFL game outcomes. Although its top-line growth has been impressive for the quarter, its bottom line remained weak. DKNG reported widening losses and a net loss per share. DKNG shares tumbled in price on the news.

The company also recently withdrew its bid to acquire betting giant Entain, a deal that would have provided DKNG a foothold in the international gambling market. DKNG shares have slumped 45% in price over the past year and 40.3% year-to-date. The stock has retreated 31.4% over the past month to close its last trading session at $27.81, near its 52-week low of $27.48, which it hit on December 3. The stock is trading way below its 50-day and 200-day moving averages.

Here is what could shape DKNG’s performance in the near term:

Lofty Valuation

In terms of forward EV/Sales, DKNG is currently trading at 8.43x, which is 487.3% higher than the industry 1.44x average. Also, its 8.95 forward Price/Sales ratio is 652.3% higher than the 1.19 industry average. Also, DKNG’s 7.27x forward Price/Book is 103.6% higher than the 3.57x industry average.

Poor Profitability

DKNG’s negative 122.02% and negative 125.74% respective EBIT and net income margins are  substantially lower than the 9.66% and 6.56% industry averages. Furthermore,  DKNG’s ROE, ROA, and ROTC of negative 75.35%, 33.80%, and 33.96%, respectively, compare with the 7.23%, 5.96%, and 7.56% industry averages.

Disappointing Financials

DKNG’s cost of revenue increased 76.8% year-over-year to $170.75 million in its fiscal third quarter, ended September 30. Its loss from operations stood at $546.52 million, up 56.9% from the same period last year. Its net loss attributable to common stockholders grew 37.8% from its year-ago value to $545.03 million. And the company’s adjusted loss per share was $1.35 versus the $1.06 consensus estimate. Also, its trailing-12-months net operating cash flow and levered cash flow were  negative $457.28 million and negative $3.36 million, respectively.

POWR Ratings Reflect This Bleak Prospects

DKNG has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of F for Quality, which is consistent with its lower-than-industry profit margins.

DKNG has a D grade for Value. Its stretched valuations justify this grade.

Of the 32 stocks in the D-rated Entertainment - Casinos/Gambling industry, DKNG is ranked the last.

Beyond what I have stated above, one  can also view DKNG’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Entertainment - Casinos/Gambling industry here.

Bottom Line

Although DKNG has reported solid revenue growth, the company’s bottom line has remained bleak. Analysts expect the company’s EPS to decline 13.2% in the current quarter and 31.2% in the current year. Furthermore, the stock’s current valuation does not justify its underlying fundamentals. And its 2.02 beta  indicates high volatility. Given its bleak near-term prospects, we think the stock is best avoided now.

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

While DKNG has an overall POWR Rating of F, one might want to consider investing in the following Entertainment - Casinos/Gambling stocks with an A (Strong Buy) rating: Golden Entertainment, Inc. (GDEN), Accel Entertainment, Inc. (ACEL), and Century Casinos, Inc. (CNTY).

DKNG shares were trading at $26.89 per share on Wednesday morning, down $0.92 (-3.31%). Year-to-date, DKNG has declined -42.25%, versus a 24.75% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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