Shares of digital gaming and media company DraftKings are down 83% from all-time highs, making it a compelling bet at current multiples.
A digital sports entertainment and gaming company, DraftKings (NASDAQ: DKNG) was founded in 2012. Currently valued at a market cap of $5.34 billion, DraftKings has a portfolio of products in the daily fantasy, digital media, and regulated gaming segments. It claims to be the only vertically integrated sports betting operator in the U.S.
DraftKings went public via a SPAC (special purpose acquisition company) merger in 2020. As tech stocks drove markets towards all-time highs, shares of DraftKings touched a record high of $72. It's currently trading at $12.23.
So, is DraftKings stock a buy or a sell given its depressed valuation?
The bull case for DraftKings
DraftKings increased its sales from $226.27 million in 2018 to $1.29 billion in 2021. In Q1 of 2022, DraftKings reported revenue of $417 million, an increase of 34% year-over-year. Sales from its business to consumer (B2C) segment stood at $404 million, rising 44% compared to Q1 of 2021. Further, its adjusted EBITDA outperformed the midpoint of management guidance in Q1 by more than 12%.
DraftKings managed to deliver significant growth across various revenue and performance metrics. The company emphasized that it is relatively immune to inflationary pressures as consumer demand remains solid. DraftKings continues to enhance the user experience, improving customer engagement over time.
Due to its stellar performance in Q1, DraftKings increased the midpoint of its fiscal 2022 revenue guidance by $50 million, while adjusted EBITDA loss guidance narrowed by $75 million. This suggests that DraftKings expects revenue to rise by around 53% year-over-year at its midpoint guidance.
DraftKings monthly unique payers (MUP) increased 29% to two million, reflecting robust player acquisition and retention across its online sportsbook and iGaming products. The average revenue per MUP stood at $67 in Q1, rising 11% year-over-year due to strong customer engagement and a shift in revenue mix towards its iGaming product.
After successfully launching in states such as New York and Louisiana, DraftKings now has access to 36% of the country's population. Its iGaming product is live in five states, which accounts for 11% of the U.S. population. As states continue to legalize online betting, DraftKings is well poised to benefit from this secular tailwind and grow revenue even higher.
The bear case for DraftKings
DraftKings remains unprofitable, which might worry investors given a volatile macro environment. While DraftKings is expected to narrow its loss per share to $2.20 in 2023 from $3.78 per share in 2021, the company continues to spend heavily to acquire customers.
In Q1, its sales and marketing expenses stood at $321 million, an increase of 40% compared to the year-ago period. Comparatively, its operating costs surged by 46% to $933 million in the March quarter.
Any massive earnings miss or a wider-than-expected loss will drag DKNG stock lower in the upcoming months.
So, should I buy DKNG stock?
DraftKings is valued at a forward price to sales multiple of 2.5x, which is not too expensive. Further, DKNG stock is down 83% from all-time highs, allowing you to buy the dip. Finally, the company ended Q1 with $1.77 billion in cash and $1.32 billion in debt, providing it with enough liquidity to offset losses.
DraftKings is part of a rapidly expanding market and seems like a top contrarian bet right now. DKNG stock is trading at a discount of 130% compared to consensus price target estimates.
