Summary
- DraftKings stock has dramatically outperformed S&P 500 since the beginning of the year and currently, it’s priced at a market cap of more than $13 billion.
- With a lack of competitive advantages and no guidance for the full-year, we strongly believe that DraftKings stock is overvalued.
- We’re short DraftKings.
DraftKings (DKNG) stock had a remarkable performance in the first half of the year and showed a triple-digit growth rate. In 2018, DraftKings used the first-mover advantage and quickly expanded its presence all around the country in states, that legalized sports betting, which helped it to gain more popularity and raise brand awareness. As more states will continue to legalize spor ts betting, analysts’ predict DraftKings annual revenue growth rate to be around 50%. While such an expected growth rate on an annual basis is quite impressive, we believe that DraftKings has no real competitive advantages, which could otherwise help it keep such a high growth rate over the long-term.
At the same time, the company continues to lose money quarter after quarter, and with a revenue of slightly less than $90 million in Q1, its net loss widened Y/Y and was close to $70 million. By having a market cap of over $13 billion, DraftKings, in our opinion, is an overvalued stock and it has all the chances to depreciate after an impressive run on poor earnings data from Q2, as the company currently burns $15 to $20 million per month due to the lack of sports events. For that reason, we’re short DraftKings.
Irrational Exuberance
DraftKings started in 2012 as a fantasy sports company, but later quickly expanded into sportsbook services and online betting. Its business makes money from bets that users place on its platform on different sports and other events. Thanks to its aggressive marketing strategy in the last couple of years, which included corporate sponsorships and television ads, DraftKings quickly gained popularity, raised its brand awareness among users, and successfully expanded all around the country, where sports betting is legal.
In the first three months of 2020, DraftKings managed to increase its revenues by 30% Y/Y to $88.54 million, but the company was still unable to make any profits. Its GAAP EPS for the period was -$0.18, while the net loss widened by 132% Y/Y to $68 million. The lack of profits is not something new for the company, as for the whole 2019 its net loss was nearly half of its total revenues. At this point, it’s unknown when the company will start making money, but that doesn’t seem to bother the market at all, as DraftKings stock has dramatically outperformed S&P 500 since the beginning of the year and currently it’s priced at a market cap of more than $13 billion.
Chart: Bloomberg
The repeal of the Professional and Amateur Sports Protection Act two years ago by the Supreme Court paved the way for the expansion of DraftKings and other betting companies all around the country. Currently, there’s every reason to believe that sports betting will be legalized inside the United States in the next few years, as there are already 17 states that regulate the activity, 5 states that passed the bill, and another 17 states that have active bills on the floor. Considering this, we believe that DraftKings will be able to keep some momentum, as there’s always going to be room for expansion and new market opportunities until all the States legalize sports betting.
