Companies like DraftKings (DKNG), which bring online gambling and sportsbook betting to more places, got a lot of traction from the pandemic. Shuttered casinos brought plenty of interest to their online equivalents. DraftKings’ latest quarter wasn’t perfect, but there was enough benefit found to drive the company up 9.8% in premarket trading on Friday. However, those gains turned around, and the stock is now down over 6%.
I’m bearish on DraftKings overall. This may be one of the leaders in the field, but what it had to do to get there is posing a serious risk to the company’s future. Throw in a worsening economic picture that’s likely to shut down a lot of gambling for the average consumer, and the end result is not a positive picture.
The last 12 months for DraftKings haven’t been positive. The company spent May to September 2021 making slow gains. However, not long after Labor Day, the company started a precipitous drop that cost it about three-quarters of its share value, going from just over $60 to just under $15 in April 2022.
The latest news initially seemed like it was going to help get that share price back up, though. The company posted revenue of $417 million, which beat estimates by around $5.76 million. That was just the start of the good news, as the company also posted gains of around 29% in monthly unique paying customers.
It also posted an 11% gain in the average revenue said monthly unique payers provided. The company still projects a loss for the 2022 Fiscal Year. However, it did lower the amount of the loss from a range of $825 million to $925 million to a range of $760 million to $840 million.
Wall Street’s Take
Turning to Wall Street, DraftKings has a Moderate Buy consensus rating. That’s based on nine Buys and 10 Holds assigned in the past three months. The average DraftKings price target of $32.15 implies 137.3% upside potential.
Analyst price targets range from a low of $18 per share to a high of $60 per share.
Most Investor Sentiment Markers are Positive
Here’s the good news for anyone planning an investment in DraftKings: you’re in good company – and lots of it. Pretty much every investor sentiment marker is positive with one exception, and that’s not so much “negative” as it is “absent.”
Hedge funds are continuing their run-up in DraftKings purchases. Ever since December 2020, the TipRanks 13-F Tracker reveals, hedge funds have been increasing their DKNG involvement every quarter. The quarter ending March 31 is no exception, as hedge funds went from just over 21.3 million shares to just over 23.4 million shares.
Meanwhile, insider trading at the company is also increasingly buy-weighted. In the last three months, buy transactions have outpaced sell transactions by 34 to 4.
In fact, no insider at DraftKings has sold stock since February 2022. For the last 12 months, it’s been a much closer matter. Buy transactions still led sell transactions, but by a much closer margin of 82 to 66.
As for retail investors who hold portfolios on TipRanks, that’s gaining as well. While TipRanks portfolios containing DraftKings were only up 0.1% in the last seven days, they’re up 2.6% over the last 30 days. Meanwhile, DraftKings’ dividend history just doesn’t apply, as it doesn’t exist.
Burning Furniture to Heat Up the Room
The elephant in the room, of course, is that DraftKings is extremely vulnerable to a recession. With inflation on a tear and the supply chain in tatters, a recession looks more likely than it has in years. A loss in discretionary income is all but certain for most out there, and that’s going to hit DraftKings right in the revenue generator.
It’s not going to collapse it entirely, of course; a loss in discretionary income is far removed from a loss of discretionary income. Bets will still be made on the various games, especially as baseball season is about to start up. To that end, DraftKings has made some positive moves to augment its position.
DraftKings’ acquisition of Golden Nugget Online Gaming is set to provide a “meaningful revenue uplift,” which makes sense. It’s one more avenue for people to bet. Though the question there becomes whether or not the revenue generated therein will offset what was spent to get it.
Indeed, that’s a proposition some question; Motley Fool writer Luke Meindl noted that DraftKings has been “recklessly spending” to augment its growth. The purchase of Golden Nugget was one thing; the company spent nearly $1 billion on sales and marketing efforts back in 2021. That was nearly double the figure from a year prior. That also makes profitability an uncertain picture at best.
As we saw with earnings, the company is bringing in more players, and those players are spending more. However, DraftKings is spending money at such a clip that it’s not likely to realize a profit from those players for quite some time.
Worse yet, with a worsening economy afoot, those players aren’t likely to keep spending more for much longer. Food and fuel prices are on a tear. There’s little end in sight. That makes it a long shot at best to suggest players will keep placing big bets.
Concluding Views
DraftKings was not afraid to do what it believed it needed to do to pull in more players. Indeed, it succeeded, pulling in plenty more new players who were willing to drop more cash at the sportsbook. However, will DraftKings get the results it fought so hard to achieve?
This is going to limit DraftKings’ ability to respond to changing conditions later on. That, in turn, will make it that much harder for the company to advance.
DraftKings shares are a comparative bargain right now. However, I wonder if now is the time to buy. Reduced revenue will do that, especially when you’ve just bet the farm on pulling in more players. That’s why I’m bearish going forward on DraftKings.
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