Investing in stocks can be a risky endeavor. Buying a stock does not guarantee an investor a return on that investment. For that matter, it does not even guarantee an investor a return of their initial investment.
That risk is exacerbated when investing in companies that have not established a consistent streak of positive and growing earnings. The other side of the coin is that higher risk sometimes means a potentially greater reward. That's the case with Pinterest (PINS -0.18%) and DraftKings (DKNG -3.82%), which have yet to deliver consistent profits, but whose massive potential makes the investment worthwhile.
Pinterest is an image-based social media company that is free to join and use. Offering something of value for free typically results in lots of takers. That's been true for Pinterest, which boasts 444 million monthly active users as of its fiscal third quarter ended Sept. 30. That's up by 2 million from the same time last year, but more importantly, it's down by 24 million from two quarters earlier.
The company attracted millions of new users during the earlier phases of the pandemic when folks were spending more time at home. Now that economies are reopening, Pinterest is shedding users rapidly. Therein lies one of the risks in investing in Pinterest; it's not sure for how long and how many users Pinterest will lose as economies reopen.
Since Pinterest is free to join and use, it makes money by showing advertisements to consumers browsing its site and app. Revenue has grown from $473 million in 2017 to $1.7 billion in 2020. However, Pinterest has generated operating losses of over $1.5 billion during that time. There is no telling if or when the company will deliver consistent profits.
The risks are apparent for this social media company, but the massive opportunity makes investing worthwhile. According to GroupM, global advertising spending will grow by 22.5% and reach $763 billion in 2021. What's more, digital advertising is taking a larger share of overall ad spending, which is estimated at 64.4% in 2021, from 52.1% in 2019.
At $1.7 billion in revenue in 2020, Pinterest is still a tiny part of the global advertising industry. It can grow to take a larger share of the market, resulting in it turning the corner on profitability.
DraftKings is an internet gaming company. Folks can go to DraftKings to play daily fantasy sports, make a wager on a sporting event, or play online casino-style games like Blackjack. That is, of course, if you are in one of the states in which it has the approval to operate. DraftKings operates a mobile sportsbook in only 15 states and has iGaming services in only five.
DraftKings is at the mercy of state legislatures to legalize and approve it to operate inside their jurisdiction. Even if they grant the license to operate, the terms may not be favorable. For instance, DraftKings was recently approved to operate in New York state. Indeed, adding the populous state could be lucrative for DraftKings, but the state is asking for 51% of gross gaming revenue in return for allowing DraftKings a license.
Adding to DraftKings' risk is the heavy spending every time it launches in a new state. Management is estimating that revenue will reach $1.26 billion in 2021, multiples higher than the $192 million in revenue it earned in 2017. However, the losses on the bottom line are adding up. In the nine months ended Sept. 30, it has already lost $1.2 billion.
Still, DraftKings offers investors substantial upside. Once the company completes expansion into new territories, spending on marketing and promotion could drop meaningfully. What's more, operating a mobile gaming company could be more profitable than brick-and-mortar casinos. DraftKings does not need to build and maintain huge buildings, which could cost billions.
Yet before the pandemic disrupted the industry, some of these operators of large casinos earned operating profit margins consistently above double digits with several billion in revenue. Recall the phrase, "the house always wins." Digitally native DraftKings has the potential to deliver better profit margins and revenue.
Overall, Pinterest and DraftKings stock are risky investments, but the massive rewards make them worthwhile for long-term investors.