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Expect DraftKings to Carry on With its Losing Streak

InvestorPlace - Stock Market News, Stock Advice & Trading Tips With its path to profitability still unclear and competition rising, former favorite DKNG stock is a bad bet. The post...

This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

When it comes to gambling, they say, "the house always wins." But that hasn't been the case with DraftKings (NASDAQ:DKNG) and DKNG stock. The i-gaming and online sportsbook operator has captured a large share of the fast-growing U.S. internet gambling market.

Image of the DraftKings app on a smartphone screen.
Source: Tada Images / Shutterstock.com

The problem is that it spends around $2.83 on expenses for every dollar of revenue it generates. To attract and retain users, it has to break the bank with high marketing and promotion costs.

If you talk to those bullish on the stock, and they'll say its high operating losses are "transitory." In time, as it finishes scaling up, it'll be able to take its foot off the gas with marketing spending. From there, what it's spending now on customer acquisition costs will fall straight to the bottom line.

Yet given the high competition, including from land-based casino operators with greater cross-promotional capabilities, it's not for certain its operating costs will come down over time. Add in the fact that the hype for sports betting plays has long since passed, and you know it's a bad bet, pure and simple.

The Latest With DKNG Stock

On Feb. 18, DraftKings released its fourth-quarter and full-year results for 2021. In the report, management touted that its revenue for the period ($473 million) was up 47% year-over-year. It came in above guidance as well.

For the full year, revenue came in at around $1.3 billion. That was more than 100% above what it reported for 2020. But while the top line came in fine, its bottom line was far different. Operating losses rose along with sales. Year-over-year, operating losses went up by 85% from $843 million to $1.56 billion.

Its guidance for 2022 was also bad news for DKNG stock investors. The analyst community projected the company would see adjusted EBITDA losses of $699 million this year. Per management's updates, it's going to be in the ballpark of $825 million to $925 million.

The market, to no one's surprise, responded very negatively to results and guidance. Shares took a dive of more than 21% right after these results.

Since then, it's recovered a bit. At around $20 per share, it's almost back to what it was trading for pre-earnings. Some of this may be due to investors warming up to the bull case one analyst has been pitching. Yet it's far from a lock that this will pan out.

Lowering Costs May Prove Difficult

In response to the earnings release and guidance update, one firm on the sell-side downgraded DKNG stock. Other analysts have left their ratings unchanged, but have slashed price targets.

One analyst, though, remains very bullish on the stock: Morgan Stanley's Thomas Allen. He believes investors are short-sighted when it comes to this stock. They're too focused on its current high losses.

Per Allen's view, long-term potential should be what's top of mind. To make his case, Allen cites what played out in markets that legalized online gambling years ago. As the industry matured, the leading companies in the space were able to bring down their customer acquisition costs, becoming highly profitable (think 25%-30% margins) in the process.

Assuming this will play out here, Allen deduces DraftKings will someday become a high-margin business. But in my view, that looks like a big assumption to make right now.

Making a comparison between the online gambling market in the U.S. and a mature market like the U.K. may be an apples-to-oranges situation. Why? The U.K. consists mainly of online-only operators. Meanwhile, the U.S. market includes several "hybrid" operators that are quickly gaining market share.

When I say hybrid operators, I'm talking about gambling giants that own both i-gaming and sportsbook platforms as well as bricks-and-mortar casinos. These companies may have the edge.

In large part, they can come out on top because they are able to cross-promote between their real-life and digital properties. This advantage may limit DraftKings' ability to eventually bring its marketing and promotions spending under control.

The Bottom Line on DKNG Stock

Earning an "F" rating in my Portfolio Grader, this once-heavy-favorite has become a heavy underdog. But while it sometimes pays to go against the crowd, in this situation there's no reason to try and fade the public.

Based on its most-recent guidance, DraftKings will continue to incur heavy losses. Competition from better-positioned "hybrid" operators may limit its ability to eventually lower its marketing spending. With its revenue growth expected to slow as well, the window is closing on its ability to become a business worthy of its current market capitalization of $9.1 billion.

DraftKings is now valued more on results rather than hope and hype. As said results fail to live up to past expectations, now is not the time to double down on a DKNG stock wager. Instead, the best move is to move on.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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