Shares of leading digital sports gaming firm DraftKings (NASDAQ: DKNG) can’t seem to catch a break, with the stock steadily declining for most of 2021.
Whenever the Nasdaq 100 takes a jab, DraftKings takes a one-two hit straight to the chin. Indeed, such amplified downside can be expected if this rotation out of high-multiple growth continues as we inch closer to rate hikes.
Although investors have mostly braced themselves for higher rates, there’s still a lot that can go wrong for the high-flyers as they continue falling back to Earth. DraftKings and many pandemic winners could surrender their 2020 gains this year if the negative momentum mounts.
At writing, shares of DKNG sitting down around 66% from their high, with a considerable amount of momentum to the downside. Whether DraftKings gives back its pandemic gains remains to be seen.
Although a bottom may still be a long way off, I do think there’s some value to be had in DraftKings for long-term thinkers who understand the growth story and are willing to take a further hit.
Still, it’s too hard to catch such a fast-falling knife. Until negative momentum slows down, I am neutral on the stock.
DraftKings’ Sell-Off Has Been Excruciatingly Painful
For many shareholders, the vicious sell-off in DraftKings stock seems like it’ll go on forever, but it won’t.
The company is on the receiving end of a broader market rotation, with a big-name short-seller in Jim Chanos who took aim at DKNG last year. Indeed, when shorts speak, it can save you some money to be all ears.
Chanos’ primary concern with DraftKings was its sizeable marketing spend and valuation. Thus far, Chanos has been right on the money. Eventually, he will take profits, likely once negative momentum subsides. That’s why I wouldn’t bet against the stock with so much damage that’s already in the rearview mirror of DKNG stock.
Investors have turned against unprofitable and high-multiple growth. With rates ready to rise in 2022, stocks primarily valued on a price-to-revenue basis will be among the most vulnerable to further downside in 2022.
That said, one has to draw the line somewhere. Eventually, a name like DraftKings will overextend to the downside, leaving ample upside for contrarians courageous enough to go against the grain.
Revenue Growth Remains Robust
Despite the magnitude of the sell-off, DraftKings stock is not even close to being cheap. In fact, it’s still at a nosebleed-level valuation at just shy of 20 times sales. The bottom-line trend is also ominous, with wider-than-expected losses clocked in for the first three quarters of 2021.
Undoubtedly, DraftKings’ has been on quite the spending spree, and it has many concerned as losses pile up at an accelerating rate. With monthly unique payers rising 31% year-over-year, amid rolling out the sports-betting app in new states, there’s still incredible growth to be had.
Whether DraftKings is right to be so aggressive with its budget remains to be seen. Regardless, investors had better get used to excessive spending, as the industry could begin to consolidate over the coming years. Further acquisitions could prove to be a gamble for DraftKings, depending on the price paid.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, DKNG stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are nine Buy recommendations, nine Hold recommendations and one Sell recommendation.
The average DraftKings price target is $50.47. Analyst price targets range from a low of $23 per share to a high of $76 per share.
Bottom Line on DraftKings Stock
DraftKings continues to be a risky proposition. The stock remains expensive, even after a brutal 2021, and its growing losses may be a cause for concern.
Although many years of double-digit growth are still left in the tank as the industry matures, it’s tough to say whether the firm is getting the best odds for its strategic bets.
In any case, DraftKings has a nice seat to its relatively untapped niche market that could see more in the way of incredible revenue growth.
For now, profitability is still a long way off, and for that reason, the stock probably will not bottom until the broader high-multiple tech sell-off abates.
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Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
