DraftKings' (DKNG 4.96%) stock crashed more than 20% on Feb. 18, the day it announced fourth-quarter and 2021 earnings. The market was not pleased with mounting losses on the bottom line.
The sell-off took the wind out of the company's chance to celebrate another year of accelerating revenue growth. Let's review.
2021 marked the third consecutive year of accelerating revenue growth for DraftKings. Image source: Getty Images.
DraftKings' losses continue
On the bright side, 2021 was a year of significant growth as DraftKings more than doubled revenue to $1.3 billion. The company offers daily fantasy sports, mobile sports betting, and iGaming services. The business has come a long way since achieving revenue of $192 million in 2017.
Still, the market was not impressed, because of mounting costs to achieve this growth. Sure, revenue more than doubled last year, but losses from operations almost did the same, increasing from $850 million to $1.6 billion. Losing over 100% of revenue on the bottom line is a troubling figure to be sure.
DraftKings' biggest expense category in 2021 was sales and marketing. Mobile sports betting and gaming are only recently being legalized by states. With each new state that DraftKings enters, it spends aggressively on sales and marketing to let its population know that the service is now available.
DraftKings is now live in 17 states for mobile sports betting and five for iGaming. That can be viewed as both good and bad. On the positive side, it means there is plenty of room to keep growing despite the more than sixfold increase over the previous five years. On the negative side, it means the company is likely to continue reporting losses on the bottom line while it expands into new markets.
That said, management forecasts it will start reporting positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fourth quarter of 2023. For 2022, the company projects losses of around $875 million.
The stock is caught up in a broader sell-off
Interestingly, the company's prospects have arguably only improved in the past year. It gained access to lucrative new markets like Arizona and New York State, revenue more than doubled from the prior year, and it increased monthly unique players from 883,000 to 1.494 million. Yet DraftKings stock is down more than 70% in the past year.
The primary factor that changed is that the market lost its appetite to support unprofitable growth stocks. DraftKings has been caught up in this broad sell-off that gains steam every quarter it reports losses on the bottom line.
Because the company is delivering solid growth -- as evidenced by rapidly increasing revenue and customers -- this might be an excellent time for long-term investors to consider adding shares of DraftKings to their portfolios.
