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DraftKings Is Struggling to Beat the Online Betting Competition

·4 min read

Amid more signs of tough competition and the Street’s current aversion to expensive stocks and unprofitable companies, DraftKings (NASDAQ:DKNG) stock remains a name that investors should avoid.

DraftKings (DKNG) logo, magnified, on its app.
DraftKings (DKNG) logo, magnified, on its app.

Source: Lori Butcher / Shutterstock.com

Moreover, as further evidence that Wall Street is bearish on DKNG stock, multiple analysts have issued quite pessimistic notes about the company in recent weeks.

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DraftKings’ Tough Competition

In a Sept. 21, 2021 column on DKNG stock, I wrote, “despite the fact that I’m more upbeat on DraftKings’ marketing strategy, while the company is obviously growing rapidly, I’m still concerned about its ability to obtain enough users to approach profitability. That’s particularly true because of the many tough competitors in the sector.”

I then listed the company’s many rivals in the online betting sector, including FanDuel, Caesars Entertainment (NASDAQ:CZR), Penn National (NASDAQ:PENN) and MGM (NYSE:MGM) subsidiary BetMGM.

I’m now even more convinced that DraftKings will have great difficulty gaining enough market share in the online betting space to enter the black within the next five years. One key reason for my belief is one I expected: BetMGM has proven to be quite a formidable player in the sector.

In fact, on Jan. 19, BetMGM reported that it had already already met its goal of garnering market share of 20%-25% in the U.S. sports betting and online gaming spaces.

Also illustrating BetMGM’s strength, the joint venture expects its net revenue in fiscal 2022 to come in at more than $1.3 billion, up from $850 million in FY21. Additionally, BetMGM expects its EBITDA (earnings before interest, taxation, depreciation and amortization) to turn positive in 2023.

In another sign of the caliber of the competition that DraftKings is facing, Gary Alexander, a Seeking Alpha columnist who’s bullish on DKNG stock, recently wrote that the company’s “Overall share of online sportsbook handle has increased two points to 33% as of the end of September versus earlier in the summer, while share of gross gaming revenue (GGR) has also increased two points to 17%.”

As I pointed out in my last column, DraftKings is spending a tremendous amount of money on sales and marketing. Actually, in the first nine months of 2021, the company spent $703 million on sales and market, not much below its revenue during the same period of $822.7 million. So despite the firm’s gargantuan sales and marketing spending, it was only able to gain two percentage points of share over a period of a few months.

In my opinion, that glacial market share gain, even as the company was spending a tremendous amount to promote itself, indicates that it’s going to have a very difficult time gaining as much market share as it needs to become profitable.

Indeed, whereas BetMGM appears to be moving closer to profitability, DraftKings seems to be going in the opposite direction. In Q3, its loss from operations came in at $546.5 million, versus a loss of $348.4 million during the same period a year earlier. And in the first nine months of 2021, its loss came in at huge $1.2 billion, up from a $575 million shortfall during the same period in 2020.

Analyzing the Price of DKNG Stock

On Jan. 13, Truist analyst Barry Jonas slashed his price target on the shares to $30 from $50. While the analyst called the company “best-in-class,” in the words of The Fly, he maintained a “hold” rating on the shares.

A month earlier, MoffettNathanson analyst Robert Fishman started coverage of the stock, giving it a “neutral” rating. While DraftKings “should continue to be a top platform for both online sports betting and iGaming,” its profitability is likely to be limited by its elevated marketing and ad spending, Fishman stated, according to The Fly. The analyst placed a $36 price target on the name.

Despite their dramatic slide in recent months, the shares still have a rather large trailing price-sales ratio of 10.57, according to Yahoo Finance. Given the company’s intense competition and the fact that its bottom line is way in the red and moving in the wrong direction, that price is way too high for this stock.

On the date of publication, Larry Ramer held a long position in MGM stock. 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 14 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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