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DraftKings may not be as much of a gamble as it looks
The last time we checked in with DraftKings Inc. (NASDAQ:DKNG), the sports gambling stock was receiving some much-needed bullish analyst attention. The company and subsequent stock is fascinating; how many names out there are directly dependent on legislation being passed? There are a course a number of other factors to consider that we'll examine below, but what makes DKNG exciting for retail traders is they can physically see the expansion of sports gambling unfold before their very eyes thanks to sportsbooks and dozens of DraftKings partnerships. But facing a 20% year-to-date deficit, is the former the growth stock worth taking a flier on?
DraftKings reports fourth-quarter earnings before the market opens on Friday, February 18. Half of the stock's post-earnings reactions in the last eight years have been to the downside, including a 2.4% drop in November and a 6.7% bear gap in May. Overall, the options market is pricing in a 20.3% post-earnings move for DKNG on Friday, much larger than the average post-earnings move of 6.1% the stock has made in the last two years.
No stock has been as emblematic of the rotation out of growth stocks like DKNG. The shares were brushing up with $65 back in September, and fell to multi-year bottoms of $21.17 on Jan. 22. Pessimists have been drawn in like a moth to flame. Short interest is up 5% in the most recent reporting period, while the stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is higher than all but 5% of readings in its annual range.
The sports betting company has increased its trailing 12-month revenues 86% since fiscal 2020 and a massive 406% since fiscal 2018. However, DKNG has generated $1.05 billion in net losses over the past 12 months, indicating a $208 million decrease since fiscal 2020 and a $976 million decrease since fiscal 2018.
Nonetheless, DraftKings is estimated to deliver a $1.12 increase in earnings for fiscal 2022, which would mark a significant shift toward reducing its net losses. DKNG is also estimated to grow revenues 49.7% in fiscal 2022, continuing its high growth rate. In addition, the sports betting company has a solid balance sheet with $2.39 billion in cash and $1.32 billion in total debt, ultimately leaving DKNG in a strong position to continue growing and to pursue profitability.
Overall, DraftKings stock is undoubtedly a high-risk, high-reward play; the stock’s dip in price offers an excellent buying opportunity for growth investors looking to take on that risk for the long-term.