Expect DraftKings to Continuing His Defeat

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When it comes to gambling, they say, “the house always wins.” But that’s not the case with DraftKing (NASDAQ:DKNG) and DKNG stock. I-gaming operators and online sportsbooks have captured a large part of the rapidly growing US internet gambling market.

TThe problem is that it spends about $2.83 in expenses for every dollar of revenue it generates. To attract and retain users, he has to spend a lot of money with high marketing and promotion costs.

If you talk to those who are bullish on the stock, and they will say that their high operating losses are “temporary.” In time, when it’s finished upgrading, it will be able to release its gas with marketing expenditures. From there, what’s being spent now on customer acquisition costs will drop right down to the bottom line.

But given the high competition, including from land-based casino operators with greater cross-promotional capabilities, it’s not necessarily the case that operating costs will go down over time. Add in the fact that the hype for sports betting games is long gone, and you know it’s a bad bet, pure and simple.

Latest With DKNG Stock

On February 18, DraftKings released its fourth-quarter and full-year results for 2021. In its report, management touted that its earnings for the period ($473 million) up 47% year over year. It comes on top of guidance too.

For the full year, revenues totaled about $1.3 billion. That’s more than 100% above what was reported for 2020. But while the top line is fine, the bottom line is much different. Operating losses increase with sales. Year over year, operating losses rose 85% from $843 million to $1.56 billion.

His guidance for 2022 is also bad news for DKNG stock investors. The analyst community projects the company will suffer an adjusted EBITDA loss of $699 million this year. Per management update, it will be at an average of $825 million to $925 million.

The market, to no one’s surprise, responded very negatively to the results and guidance. The stock fell more than 21% right after this result.

Since then, it recovered quite a bit. At around $20 per share, it’s almost back to what it was trading for pre-earnings. Some of that may be because investors are warming to the bull case that an analyst has put forward. However it’s far from key that this will work.

Lowering Costs May Prove Difficult

In response to earnings releases and guidance updates, one company on the sell side lowered DKNG stock. Other analysts have leaving their rankings unchangedbut has cut its target price.

One analyst, however, remains strongly bullish on the stock: Morgan Stanley’s Thomas Allen. He believes investors are petty when it comes to these stocks. They were too focused on high losses at the moment.

In Allen’s view, long-term potential should come first. To make his case, Allen cites what played out in the market that legalized online gambling years ago. As the industry matures, leading companies in this field are able to lower their customer acquisition costs, becoming very profitable (think 25%-30% margin) in the process.

Assuming this will play out here, Allen concludes that DraftKings will one day become a high-margin business. But in my opinion, that seems like a big assumption to make at this point.

Making a comparison between the online gambling market in the US and a mature market like the UK may be an apple-to-orange situation. Why? The United Kingdom consists mostly of online operators only. Meanwhile, the US market includes several “hybrid” carriers that are rapidly gaining market share.

When I say hybrid operators, I’m talking about gambling giants that have i-gaming platforms and sportsbooks as well as brick-and-mortar casinos. These companies may have an advantage.

For the most part, they get to the top because they can cross-promote their real-life and digital properties. These advantages may limit DraftKings’ ability to control its marketing and promotion spending.

Bottom line on DKNG Stock

Get an “F” rating on my Portfolio Assessor, this once heavy favorite has become a heavy underdog. But while it sometimes pays to fight the crowd, in these situations there’s no reason to try and fade the public.

Based on its latest guidance, DraftKings will continue to suffer heavy losses. Competition from a better positioned “hybrid” operator could limit its ability to ultimately lower its marketing spend. With its revenue growth expected to slow as well, the window is closing in on its ability to become a viable business for its current market capitalization of $9.1 billion.

DraftKings is now valued more on results than on hopes and hype. As the result failed to live up to past expectations, now is not the time to double bet on DKNG shares. Instead, the best move is to move on.

As of the date of publication, neither Louis Navellier nor any member of the Research Staff of InvestorPlace is responsible for this article (either directly or indirectly) holding any position in the securities referred to in this article.

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