This article is sponsored by RePlatform! Check out their upcoming event in Las Vegas!
About DraftKings
Sports betting is on the rise, not a single question about it.
As platforms such as DraftKings, the unequivocal digital leader of sports betting, continue rising in their national and global presences, it is becoming easier than ever to find a game, bet on some outcomes, and either subsequently be filled with feelings of great elation and copious amounts of earthly joy thereafter the player you bet on hits a clutch game-winning jumpshot or falling into a depression-induced spiral and questioning all of your life choices leading up to that point.
It’s usually either one or the other.
Obviously, people tend to be very emotional when it comes to money, and betting is undoubtedly one of the most emotion-driven branches of personal finance, as an alarming amount of folks find themselves betting on a “sure thing” yet they have absolutely zero control over that “sure thing” from actually occurring, and especially in the context of a betting house and platform such as Boston, Massachusetts-headquartered DraftKings, sports betting is notoriously known for offering a lack of control and available strategy implementation, simply because I can’t control whether or not some player on the Houston Rockets makes or misses a free throw, either event potentially obliterating my DraftKings winnings in an instant or making me rich beyond my wildest dreams.
In my opinion, it’s just all too much and it really is saddening to see how many have their livelihoods and relationships destroyed over a developed yet still snowballing addiction to betting, whether within the confines of sporting events or not.
Of course, there are plenty of winners who partake in the events and pot offerings on DraftKings’ platform, but, let’s just say I’d rather spread my risk out a bit and win often but slowly in the context of the stock market than win quickly and sparsely (if at all, or ever) in the sports betting arena.
It might be for you, and that’s fine, but it just ain’t for me, but no one ever asked, so it’s all good!
From a more objective, business-centric perspective, DraftKings is a sports betting and fantasy sports company that offers users the opportunity to sign up and get instant action (as they say within the gambling industry) on anything from professional football, soccer, basketball, baseball, hockey, martial arts, Formula One and NASCAR racing, golf, tennis and a host of other developing and perhaps lesser known sports, allowing them to bet on a whole range of different outcomes.
Stemming off of this, specifically regarding the two main tiers of DraftKings’ broad business offerings, it really comes down to concentrated, individual gambling/betting on events occurring within a game or series as well as the company’s fantasy sports division, where users can devise their own teams and either win or lose based on the actual performance of the players they draft within their fantasy league team.
In breaking this down a little bit, the first tier is most akin to traditional sports betting, where one can simply find a game and bet on a variety of different outcomes, such as a player scoring a certain number of points in the first quarter or dishing out a specific number of assists (passes that lead directly to a team scoring a point), and a whole host of other particular events.
Again, just your basic, run of the mill in-game action and sports betting.
The second tier lies within the company’s fantasy sports department, where users can get together with their friends or coworkers and devise and draft their own teams and rosters (it is indeed as nerdy as it sounds), filled with actual players from a bunch of different teams, and the wins, losses, minuses and pluses are rooted in how the players individually perform throughout the duration of the fantasy league.
As a brief example, let’s say you and I wanted to participate in our very own fantasy league for, say, the National Basketball Association (NBA) regular season.
This would generally just entail us signing up, more than likely through DraftKings’ platform, as they are the most well known at this point, and contributing to a pot and hoping to cash out on some, well, cash prizes (that is, if your team’s players perform well, or at least as well you thought they would), of course, after entering our selected league and getting our respective rosters put together.
Real players on your fake team, with players all across the NBA being on your one team.
I’d rather just enjoy the sport instead of making it about money all of the sudden, but that’s just me.
All of this being said, the primary way(s) in which DraftKings generates revenues is through various entry fees, including a fee to enter its fantasy league platform in order to put together a lineup, as well as a commission taken by DraftKings per bet that is placed through its platform, which is surely sensible enough, along with the company’s other more supplemental sources of revenues such as its iGaming, online casino-type platform and through select sponsorship programs and promotionals as well.
On the thought of whether or not we initially deem this company to be resistant to recessionary pressures, given what we know about the ever so growing sports betting market and the fact that gambling can be highly addictive and therefore even in a down economy, gamblers are still going to be intent on throwing some money down on the horses (or the players, literally take your pick, says DraftKings), we largely (and regrettably) assume that this company is rather resistant to such pressures, especially as interactivity across all sports categories continues rising, making things more immersive and candidly interesting for participants as well as general spectators.
Before getting into this company’s finances, I feel the need to point out that the gambling industry is highly regulated and known for receiving plenty of regulatory scrutiny, both at the state and federal levels, which to me is just something to merely consider and swallow as a fact of life, as this is most definitely an embedded risk within this company and its share price, be it both now and later.
At any rate, that’s the background and some of our thoughts and the rest is just DraftKings and its finances.
DraftKings’ stock financials
First and foremost, it would be well advised to note that DraftKings’ stock (NASDAQ: DKNG) is up around 155% over the last one year’s span of time, and sadly, we cannot go back in time and attain any sort of retroactive returns, even though we would love this to be the case, with the company’s stock more than doubling during this time period.
With respect to the future, we bring this up mainly to suggest that its shares may be fully priced in at the moment, if not perhaps overvalued relative to their true, intrinsic, sum of the parts worth, especially when considering the fact that some reputable valuation tools peg the company’s intrinsic value to be around $24 per share.
Nevertheless, we presume this company is growing its revenues and overall presence at a very rapid rate (which we will confirm later, by the way), however, with that, we also assume the company is bleeding cash, which is normal to a large degree with younger, scaling technology companies, however, we are certainly intrigued to know just how much cash the company is hemorrhaging, especially as it stands against its revenues.
So the company’s shares are likely trading at a premium valuation, at least given the information we have gathered thus far, but if the (annualized revenue) growth is there to justify such a share price, then so be it.
Additionally, it can also initially be found that DraftKings is currently a $19.96 billion company (according to its present market capitalization) with an associated share price of $42.81 along not a price-to-earnings (P/E) ratio in sight, which largely confirms our initial inkling that this company is not yet profitable, not to mention that the company doesn’t yet offer its shareholders any sort of consistent annual dividend, which is on trend with the company not being profitable, and this is definitely one of those companies that we don’t want prematurely issuing an annual dividend, as this would undoubtedly inhibit and hamper organic and inorganic growth.
Let’s call a spade a spade; DraftKings is a growth stock, no ifs, ands or buts about it.
But before delving into the company’s recent annual revenue figures, let’s take a quick peek at the company’s balance sheet, where it can be found that DraftKings’ executive team is in charge of a little more than $4 billion in terms of total assets as well as around $2.7 billion in terms of total liabilities, which for a more than likely revenue-growing company, is a pretty good spot to be in right now, as the company, from our vantage point, at least, has struck a solid balance between being in a comfortable total asset-heavy position but also maintains a posture that hints that it has and still is tacking on some debt to continue financing its current growth initiatives, and responsibly so, at that.
Now for the main course, regarding the company’s income statement, DraftKings’ recent annual revenues have been well in line with our general growth assumptions, as the company’s revenues have developed some very strong momentum stemming off of a relative base of $226 million (as reported in 2018), rising each and every year to its most recently reported revenue figure of just north of $2.2 billion, as reported in 2022, growing almost tenfold in a very, very, impressively short span of time, which even for a growth company, this is a markedly impressive rate of growth spewing from DraftKings, greatly implying that it has attained a great deal of success in terms of growing its geographical footprint and even more importantly, it is evidently tapping into and continuing to penetrate both current and new markets, also inherently indicating that the company has been getting along with the relevant regulatory agencies in order to receive the necessary and required permits to continue planting operations across the country and the world for that matter.
Onto the condition of the company’s cash flow statement, we are more than interested in seeing just how much cash this company has and is burning through in order to obtain this remarkable revenue growth, as we presume there is a lot of cash burn going on over at DraftKings.
Specifically, the company’s net income (also measured since 2018) has continued growing into exceedingly negative territories, starting at a relative high of -$76 million (2018), finding itself in a much deeper recent hole of its latest reported figure (reported in 2022) of nearly -$1.4 billion, which is certainly not a positive, but in more degrees than one, simply to be expected for such a company, especially considering just how quickly it is growing its revenues annually.
It’s rather difficult to finance growth and other related initiatives through mere hopes and dreams, hence the cash burn, however, we do take some relative comfort in the fact that the company’s sustained and associated total cash from operations losses are well below its associated revenues, reaching its highest recent amount of -$626 million (compared to around $2.2 billion in revenue during that same year), so the company is making a profit in this respect, however, on the basis of a trailing twelve month (TTM) net profit margin, that is likely to be a whole different story, and a not as pleasant one.
DraftKings’ stock fundamentals
While on the subject, let’s get to the hard facts and figures as they pertain to this company’s TTM net profit margin, as according to TD Ameritrade’s platform, the company’s TTM net profit margin is listed at -30.38% to the industry’s respective average of 12.93%, which is far from good, however, when accounting for all of the (revenue and overall geographical) growth this company is encountering at the moment and in recent history, it doesn’t really surprise us nor does it gravely concern us, as at the end of the day, DraftKings really is a rapidly expanding technology company that, like any other technology company or platform, is tasked with continuously investing and reinvesting and then reinvesting some more in its software, user interface (UI) and essentially anything and everything that has to do with its online features and operations.
So long as we see some TTM net profit margin progress towards the break-even mark within the next five years, we aren’t going to lose that much sleep regarding this company’s technically money losing operations, especially given the overall shape of its balance sheet.
With this figure, it is certainly not a shocker to also find on TD Ameritrade’s platform that the company’s TTM returns on both assets and investment(s) are also well below the industry’s respective, most recent averages, with, for example, the company’s TTM return on investment standing at -38.14% to the industry’s listed respective average of a much more impressive 17.49%.
DraftKings is planting lots of seeds in the ground and it will naturally take some time for this company to reap what it sows.
Growth comes with costs, that’s just how it goes.
Should you buy DraftKings stock?
Like I said, gambling and sports betting and the whole fantasy sports scene for that matter just isn’t for me, even though I am into playing and occasionally watching sports.
I just like the competition and I adamantly believe that all of this new technology and in-game stimulation and game within a game stuff is just really boring and even borderline stressful.
Maybe I’m just old school.
However, if this growth company was operating within any other industry and maintained the exact same figures and financials, I would feel pretty good, all things considered, as the company’s balance sheet is in good enough shape to counterbalance both growth and financial prudence, its revenues have been soaring like an absolute rocket over the last handful of years, its cash flows are reminiscent of any sort of scaling growth company, yet its total cash from operations losses (thankfully) remain well below that of its corresponding annual revenues, and while its core TTM returns on assets and investment(s) are not in the finest of forms, they are quite in line with what we had initially expected from a young, nimble, rapidly growing sports betting platform.
Also, in the interest of maintaining the utmost objectivity, whether I like it or not, sports betting and fantasy leagues are undoubtedly growing markets in and of themselves, acting as a direct tailwind for a company such as this one, generally meaning more opportunity and trail to cover and more revenues to be accumulated, and hopefully profits in the not-so-distant future.
Therefore, in putting all of the pieces together while also, of course, taking into account its most recent share price (NASDAQ: DKNG) runup, we feel most comfortable offering the company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
© 2024 MacroHint.com. All rights reserved.