DraftKings (DKNG) vs. MGM Resorts International (MGM): Which Entertainment Stock Is a Buy or Sell?

With the integration of newer technologies, there has been an unprecedented growth of online gambling and gaming activities, such as online casinos and betting, consequently propelling players in the market to adopt new technologies to survive the competition. Given this backdrop, let us evaluate two entertainment stocks.

MGM Resorts International (MGM) owns and operates casino, hotel, and entertainment resorts in the United States and Macau, whereas DraftKings Inc. (DKNG) operates as a digital sports entertainment and gaming company.

Record-high inflation has tampered with consumers’ discretionary spending, which has kept the entertainment industry under immense pressure. However, amid increased accessibility, gaining cultural acceptance, and rapid digitalization, the industry is well-placed to thrive in the foreseeable future.

Post-pandemic, casinos and online betting have gained traction due to the sustained rebound of leisure travel. Moreover, the companies could now offer a variety of their services, and expand their reach and appeal to a broader audience, thanks to technological advancements.

Technologies, such as VR and AR, have made inroads into the industry. The global online gambling market is expected to reach $213.58 billion by 2028, growing at a CAGR of 12.6% from 2022 to 2028.

MGM has gained 16% over the past six months, whereas DKNG gained 77.9%. However, over the past five days, MGM returned 3.6% to close its last trading session at $42.80, while DKNG’s stock has lost 2% over the past five days to close the last trading session at $25.46.

But which stock is a better buy now? Let’s find out.

Latest Developments

On May 1, MGM announced that its wholly owned subsidiary, LeoVegas, had entered into an agreement to acquire the majority of game developer Push Gaming Holding Limited and its subsidiaries and the future operating commitment of the founding management team.

Push Gaming's proprietary technologies, intellectual property, and development expertise will bolster the content production capabilities of LeoVegas and support its plans for continued growth through expansion.

On March 29, 2023, DKNG announced that DK Horse, the digital gaming operator’s first-ever horse racing product, was launched in 12 states. The standalone, DK Horse-branded app allows eligible customers to access pari-mutuel wagering on horse racing.

DKNG’s CEO and Chairman, Jason Robins, said, “Our goal is to provide our customers with best-in-class-sports and gaming products, and we expect DK Horse to provide a fun and new way to engage with renowned races like the upcoming Run for the Roses.”

Recent Financial Results

For the fiscal first quarter that ended March 31, 2023, MGM’s revenue increased 35.7% year-over-year to $3.87 billion. Its operating income grew 590.6% from the prior-year quarter to $730.84 million.

Net income attributable to MGM stood at $466.81 million, compared to a net loss of $18.02 million in the year-ago quarter. Its adjusted EPS stood at $0.44, significantly up from the previous-year quarter. Moreover, MGM’s free cash flow stood at $564.23 million, while its adjusted EBITDAR came in at $1.11 billion.

For the fiscal first quarter that ended March 31, 2023, although DKNG’s revenue increased 84.5% year-over-year to $769.65 million, it incurred a loss from operations of $389.79 million. The company’s adjusted EBITDA loss stood at $221.71 million.

Moreover, DKNG’s net loss attributable to common stockholders came in at $397.15 million, and the loss per share attributable to common stockholders stood at $0.87 for the same quarter.

Past and Expected Financial Performance

MGM’s revenue has grown at a 6.1% CAGR over the past five years, and DKNG’s revenue grew at a 63.5% CAGR over the past five years. Also, MGM’s total assets grew at 8.3% CAGR over the past five years, while DKNG’s grew at 85.7% CAGR over the same period.

MGM’s revenue for the fiscal year ending December 2023 and December 2024 is expected to rise 17.2% and 2.2% year-over-year to $15.38 billion and $15.72 billion, respectively. Its EPS for the fiscal year ending December 2023 is expected to come in at $2.28, and for the fiscal year ending December 2024, it is expected to grow 10.8% year-over-year to $2.53.

MGM’s revenue for the quarter ending June 2023 is expected to increase 15.5% year-over-year to $3.77 billion, whereas its EPS is projected to grow significantly year-over-year to $0.48.

For fiscal 2023 and 2024, DKNG’s EPS is expected to come in at negative $1.81 and $0.77, respectively. Its revenue for the same period is expected to come at $3.21 billion and $3.87 billion, respectively.

Its EPS for the fiscal second quarter ending June 2023 is expected to come in at negative $0.27, whereas, its revenue is expected to come in at $712.28 million.

Profitability

MGM has a trailing-12-month EBITDA and net income margin of 13.36% and 13.88% compared to DKNG’s negative 45.64% and 50.42%, respectively. Its trailing-12-month ROCE of 9.47% compare with DKNG’s negative 108.80%. Furthermore, MGM’s cash from operations of $2.04 billion compare with DKNG’s negative $470.29 million.

Thus, MGM is more profitable.

Valuation

In terms of forward EV/Sales, MGM is trading at 2.80x, 23.5% lower than DKNG, which is currently trading at 3.66x. MGM’s forward Price/Sales multiple of 0.98 is 72.7% lower than DKNG’s 3.59. Also, MSG’s forward Price/Book multiple of 2.79 is 80.7% lower than DKNG’s 14.46.

POWR Ratings

MGM has an overall rating of B, translating to a Buy in our POWR Ratings system, whereas DKNG has an overall D rating, which equates to a Sell. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MGM has a Value grade of B, consistent with its forward P/E of 13.81x, 7.3% lower than the industry average of 14.91x.

On the other hand, DKNG has a D grade for Value, justified by its forward Price/Book of 14.46x, 462.4% higher than the industry average of 2.57x.

MGM’s Quality grade of B is substantiated by its trailing-12-month gross profit margin of 49.40%, which is 40.6% higher than the industry average of 35.15%.

Conversely, DKNG’s D grade for Quality is evident from its trailing-12-month gross profit margin of 34.72%, which is 1.2% lower than the industry average of 35.15%.

Moreover, MGM’s C grade for Stability is in sync with its 24-month beta of 1.38, whereas DKNG’s Stability grade of F is justified by its 24-month beta of 2.62.

Of the 28 stocks in the Entertainment – Casinos/Gambling industry, MGM is ranked #9, while DKNG is ranked #26.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Sentiment.  Get all ratings of MGM here. To view DKNG’s ratings, click here.

The Winner

Even though the entertainment industry is largely dependent on consumers’ spending ability, increased demand could serve as an enduring tailwind for the industry in the upcoming years. MGM and DKNG could benefit from industrial tailwinds.

However, given MGM’s robust profitability scenario, attractive valuation, and favorable bottom-line estimates, the stock could be a better choice than DKNG now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment – Casinos/Gambling industry here.

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MGM shares were trading at $43.85 per share on Tuesday morning, up $1.05 (+2.45%). Year-to-date, MGM has gained 30.78%, versus a 14.39% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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