DraftKings (DKNG +4.01%) is an online gaming company that offers mobile sports betting, iGaming, and daily fantasy sports. The company has been growing customers and revenue rapidly, following the state-by-state legalization of its gaming services.
It's not yet profitable on the bottom line, as it is investing aggressively to acquire players with each new state it enters. Once the initial investments are made during its expansion phase, its profitability could trend upward. There are plenty of risks in investing in an unprofitable gaming company, but the reward could make the risk worthwhile.
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DraftKings is expanding into more states
In its most recent quarter, ended Sept. 30, DraftKings launched mobile sports betting in three states. DraftKings now offers its mobile sports betting in 15 states representing 29% of the U.S. population. That is impressive progress, but it also highlights plenty of room for growth. Indeed, The Wall Street Journal reported that DraftKings was one of the companies approved to offer mobile sports betting in New York. That massive state could potentially generate $1 billion in annual gross gaming revenue at maturity.
That should fuel DraftKings' revenue growth. Management expects to generate $1.26 billion in revenue at the midpoint in 2021, which would be more than double the $615 million in revenue it made last year. It also noted the company is likely to grow revenue to $1.8 billion next year at the midpoint, but that was before considering the New York news.
Mobile sportsbooks are further along in state legalization than iGaming. DraftKings launched iGaming -- online versions of casino-style games such as blackjack and roulette -- in one new state in the third quarter, bringing its total presence to five states representing 11% of the U.S. population.
Online gaming has the potential to be more lucrative for states and businesses compared to brick-and-mortar casinos. The latter are more expensive to maintain and could geographically be too far away for folks to visit with any regularity. State legislatures negotiate revenue-sharing agreements with gaming companies for the license to operate in the jurisdiction. Therefore, state politicians are interested in finding efficiencies like shifting gaming online.
DraftKings stock is now half the price
When DraftKings launches services in a new state, it spends aggressively on marketing to inform people in the state that they can now wager. DraftKings offers enticing sign-up bonuses to get folks to deposit and make a bet, along with an advertising campaign. Those costs are substantial, and the losses are piling up for DraftKings. It lost $545 million in Q3 and $1.2 billion year-to-date on the bottom line.
However, the spending is showing results. DraftKings had 1.3 million average monthly unique players in the nine months ended Sept. 30, up from 679,000 at the same time last year. It would worry me more if the company was spending aggressively without getting results.
Finally, DraftKings stock has more than halved from its high of $72 earlier this year and now trades at $34. The stock is still not cheap, selling for a price-to-sales ratio of 12, but the risk versus reward is more attractive at half the earlier price.
That's what makes DraftKings my favorite unprofitable growth stock right now.
