The beginning of 2021 saw a spike in online gaming and sports betting stocks as the pandemic limited social activities. But as retail and leisure outlets opened back up, it gave people more things to do, and the stocks of these companies saw a swift decline as investors grew cautious.
Now, just a few days shy of Super Bowl LVI, DraftKings (DKNG 4.96%) stock is picking up a tailwind that makes it an intriguing investment opportunity once again. The reenergized action and future outlook help make a case for investors to add this top sports betting stock to their portfolios.
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Unique scenarios provide a foundation for strong sports betting in 2022
On Feb. 13, the Super Bowl will draw in an estimated 70,000 in attendance. But that number pales in comparison to the 31.4 million people expected to place a bet on the game. According to online gaming research firm PlayUSA, over $1 billion will be bet on the Super Bowl this year. That's double what it was last year, driven by a higher volume of betting through sportsbooks and a 50% increase in the number of states where sports betting is legal.
The Olympics is another event that should bring in added revenue. Gaming experts are expecting record totals for betting on the games this year due to the increase in the number of people who have access to online sports betting.
A third major event that should drive revenue is the NCAA basketball March Madness Tournament that lasts for a few weeks starting in March and determines the national champions of men's and women's college basketball. It's not like March Madness is unique this year, but the growth in the number of states where sports betting is legal should make for a jump in revenue for DraftKings. It's estimated that over $10 billion will be bet during the tournaments.
It's more than just a betting site
But DraftKings is more than just a platform for players betting to win. Aside from in-game betting, you can also enter pools, converse in social circles, check stats, and compete in fantasy sports leagues. DraftKings is becoming a full-on entertainment site for people who bet big or small for the fun of it. I know from firsthand experience that some people see the combination of watching a game they've bet on to be more exhilarating than some movies.
DraftKings also offers rewards beyond just bet payouts, which keeps subscribers coming back. The more you bet, the more your reward points increase. The rewards can then be redeemed for DK dollars which can be used toward fantasy sports contests on the site. This helps generate engagement and a cycle of repeated use by members.
Having so many options can appeal to the interests of many without sacrificing a potentially fatal flaw of providing eventual boredom. Each game played is new. Each play that takes place has never taken place before. And as engagement piques interest, investors could benefit as revenue grows.
Obstacles to profitability remain
Just how fast revenue will grow and whether expenses can be controlled will determine the short-term health of DraftKings, but long-term investors should have less to worry about. Wall Street is expecting revenue of $445 million when fourth-quarter results are released on Feb. 18, with earnings estimated at a loss of $0.82. That revenue number would be a 109% jump sequentially over the third quarter's $213 million, which was a 60% increase year over year from Q3 2020.
Based on the previous four quarters, those numbers might be a bit optimistic. The company has failed to meet consensus estimates for four consecutive quarters, with the least of the misses being 27% to the downside. And if whisper numbers are any indication, we could be looking at a loss of $0.94 for Q4.
The company saw its costs of revenue increase by 76% in Q3, driven by higher taxes and payment processing fees. It also continued to pour money into sales and marketing expenses, which rose 50% in the quarter to $303 million. It will be interesting to see if the company contained those costs during Q4, but that containment could be short-lived. A 30-second DraftKings commercial is on tap for the Super Bowl, promoting $10 million in free bets to attract new account members. That's $10 million on top of the $6.5 million they will pay for the 30-second spot.
A declining stock price plus market growth equals opportunity
The Super Bowl ad may or may not be a game-changer for DraftKings, but the growth in revenue has investors excited of late, driven by a growing market share that is over 29% as a result of strong growth in the second half of 2021. The stock tumbled from a high of $74 last March to $19.50 in mid-January, but the price has clawed its way back up to almost $24 for a 21% rebound over the past few weeks. If analysts' price targets are any indication of where it's headed, a $40 average target represents a 74% premium over today's share price.
Feb. 18 should provide a good look at not only what took place in Q4 but also how the Super Bowl and The Olympics will impact Q1. Even if a near-term miss is in the cards yet again, DraftKings is in a market projected to grow at a compound annual growth rate of 13.6% through 2027 and remains on my board as a good pick for long-term investors.
