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DraftKings Has a Serious Profitability Problem That Isn’t Going Away

InvestorPlace - Stock Market News, Stock Advice & Trading TipsDraftKings has to run huge losses to keep up with its competitors' marketing advantages. Consequently, DKNG stock will be unattractive...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

With DraftKings (NASDAQ:DKNG) continuing to face very tough competition that's severely undermining its profitability and also about to deal with an important, near-term hurdle, the outlook for DKNG stock remains poor.

DraftKings (DKNG) logo on a phone
Source: Lori Butcher / Shutterstock.com

Given the intense competition that DraftKings is facing, I'm unsure if the company will ever be profitable. DraftKings is facing tough competition in the sports-betting space that has weighed on its profitability for some time.

Partly due to Wall Street's current focus on profitability, investors finally have realized that DraftKings' losses are very detrimental. Since its losses are mostly caused by high marketing costs spurred by intense competition, I expect the firm to remain in the red for many years, if not forever.

In 2021, for example, DraftKings' sales and marketing costs nearly doubled versus 2020 to $981.5 million. Those sales and marketing costs were equal to roughly 75% of its entire revenue for the year.

In my view, DraftKings' main underlying problem is that it's facing competitors with very strong name recognition. Those competitors are able to spend hundreds of millions on marketing costs without sustaining huge losses.

Competitors like MGM Resorts (NYSE:MGM), Penn National (NASDAQ:PENN) and Caesars (NASDAQ:CZR) also have access to contact information and data on their tens of thousands of customers. These casino owners can easily contact and effectively market their online betting businesses to these customers, many of whom enjoy gambling with large amounts of money.

It's true that DraftKings has access to many current and former fantasy sports participants. But these people are likely to spend less money than traditional casinos gamblers on the whole. These are people who like spending many hours per day and many days per year gambling.

To compete effectively with the casino owners for lucrative gamblers' dollars, DraftKings has to spend tremendous amounts of money on marketing.

Marketing Costs and DKNG Stock

DraftKings expects its EBITDA, excluding certain items, to come in at $825-$925. That is meaningfully worse than the $676 million adjusted EBITDA the company reported in 2021. The EBITDA guidance was also below analysts' prior average estimate.

Turning to the short-term challenge, Major League Baseball and its Players' Association have been unable to reach an agreement on a new Collective Bargaining Agreement.

As a result, MLB announced that its 2022 season, will be delayed beyond its slated March 31 start date. That could negatively affect DraftKings' second-quarter results since there will be no MLB games on which to bet.

Arguably, if the postponement turns out to be long-lasting, MLB's existing problems with young Americans could be aggravated, hurting DraftKings' financial results over the longer term.

Wells Fargo cut its rating from "overweight" to "equal weight," citing DraftKings' spending, which is expected to surge 60% year-over-year.

The Bottom Line on DKNG

DraftKings has a huge profitability issue because it cannot keep up its marketing efforts without generating huge losses.

This issue is not going to be resolved for the foreseeable future and may never be alleviated. Therefore, I continue to advise investors to sell DKNG stock.

On the date of publication, Larry Ramer held a long position in MGM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel's largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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