Betting on a Rebound in DKNG Stock Is Too Risky Despite Its Selloff

DraftKings Inc. (NASDAQ:DKNG) has started 2022 with poor performance, contrary to what investors may have expected. DKNG stock has lost approximately 16% of its value year-to-date (YTD) and currently trades just above $23.

A few months back, specifically in late September, I wrote that “It’s time to bet against more gains in DraftKings stock.” I mentioned that “DKNG stock is not attractive, even on the back of seemingly exciting news.” I did not like DKNG stock then, and I still don’t like it now.

DraftKings’ Entain Deal Fell Through

I want to highlight one of the concerns that proved me correct after just a few months. That was the news about DraftKings’ pending acquisition of U.K. sports betting company Entain (OTCMKTS:GMVHF) for the price of $22 billion.

I wrote the following in late September:

“However, I am concerned that this offer for Entain is too high … I have the feeling that MGM Resorts will either block the deal or make it too difficult to get approved. None of that is great news for DKNG stock moving forward.”

History proved me correct, as on Nov. 5, 2021, the deal was called off.

Chief Executive Officer Jason Robins said, “As far as why we walked away… It was really more about our confidence in our current trajectory in the U.S., our desire to focus on the U.S. and, ultimately, the value that we felt like we would be shedding by pursuing that asset.”

In simple words, it all comes down to value. This deal seemed way too expensive to go through, and in the end, it did not.

What’s Next for DKNG Stock

Another interesting fact to mention is that when my pervious article was published, the closing stock price was $49.93. Comparatively, today’s price represents a selloff of more than 50%.

Is it time to accumulate shares of DKNG stock? I continue to remain bearish.

Factors that still support my negative thesis are fundamentals, valuation concerns and headlines from major investment banking firms such as Morgan Stanley (NYSE:MS), which are trying to create a bottom reversal for the stock.

According to Yahoo!, Morgan Stanley “expects iGaming and sports betting to be a very large profitable market with only a few market participants. DraftKings is well-positioned to benefit from this prospect.” The firm believes DKNG stock represents an attractive investment opportunity.

Why am I concerned about this call from Morgan Stanley now? Its investment research department sees value over the coming years. I agree with this analysis. Still, the phenomenon of major and reputable financial firms influencing retail investors is not only annoying, but it also lacks credibility.

This call could have been made during December 2021 when the stock was in decline, or earlier in January. This delay is annoying, and I question the argument that DKNG stock is now a big investment opportunity.

Turning to fundamentals and valuation now supports my argument.

DraftKings Revenue Declined Since Q2

In the third quarter of 2021, DraftKings reported revenue of $213 million, an increase of 60% compared to $133 million during the same period in 2020. The company stated it was a strong quarter. Key highlights included the completion of sports betting technology migration ahead of schedule, user growth and engagement with new product offerings.

DraftKings reported a loss from operations of $546.5 million and net loss attributable to common stockholders of $545 million. In Q3 2020, loss from operations was $348.4 million and net loss attributable to common stockholders was $395.7 million. Net losses have widened year-over-year (YOY).

Other reasons for concern are that DraftKings continued to burn cash in the first nine months of 2021. In Q3 2021, the firm reported a free cash flow loss of $75.06 million.

Sales growth has declined for the past three consecutive quarters. In Q1, Q2 and Q3 of 2021 sales growth reported was -3.09%, -4.70%, and -28.49% respectively. Unless a shift in sales growth occurs fast, investors cannot consider DKNG stock a growth pick.

DKNG Stock is not Cheap Yet

It is also notable that Wall Street analysts mostly expect DraftKings to remain unprofitable until 2024, according to Bloomberg consensus data. Additionally, Money MSN shows that on a relative basis, the stock is still overvalued.

Specifically, its price-to-sales (P/S) ratio is 28.7x compared to the Hotels & Entertainment Services industry P/S ratio of only 3.6x. Meanwhile, the price-to-book (P/B) ratio of DraftKings is 6.6x, compared to the P/B of 3.3x for its industry.

DraftKings is a leading market share player in the very large and profitable sports betting industry. It continues to be expensive, and its fundamentals have not improved. It is losing money and burns cash.

I see potential in DKNG stock, but unfortunately, I see very poor fundamentals too. It is a bet on better days — but those bets rarely pay off when you ignore the underlying financial condition of the company.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn

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