The stock markets are enduring a trio of events that are causing some investors to look for safety. The Russian invasion of Ukraine, rising inflation, and supply-chain shortages are all bad news for markets and everyday people alike.
Folks can protect their wealth by investing in stocks not exposed to these risk factors. DraftKings (DKNG 4.96%) is a digitally native mobile gambling business with operations primarily in the U.S. As a result, it is largely immune to direct fallout from the aforementioned disruptive forces.
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New markets fueling revenue growth for DraftKings
DraftKings' immunity from these risk factors is not the only reason to invest in the company. It is growing revenue rapidly as it expands to more states in the U.S. From 2017 to 2021, revenue increased from $192 million to $1.3 billion. Management is forecasting the momentum to continue in 2022 with a revenue target of $1.93 billion at the midpoint. If it meets that estimate, it would be an increase of 48% from 2021.
The company is now live with a mobile sportsbook in 17 states representing 36% of the U.S. population, and with iGaming in five states representing 11%. Certainly, DraftKings has made excellent progress in growing the business. That said, there is plenty of room for growth and a potential to make its service available to the other 64% and 89% of the U.S. population for mobile sportsbook and iGaming, respectively.
State legislatures are showing openness to legalizing online gaming in their jurisdictions. Often, the states make deals with gaming providers to generate a sizable share of revenue to the state in the form of taxes. Therefore, it's a way to increase taxes indirectly. Since online gaming operators are digitally native, there are no massive brick-and-mortar casinos as a constant reminder of legalized gambling.
It can also be viewed positively by gaming enthusiasts within the state. Before online gambling became legal, some state residents may have had to drive hours to reach their nearest brick-and-mortar casino. Now, they can prepare their favorite cocktail and experience gaming action in the comfort of their home. These twin benefits to the state and its constituents are likely to fuel further legalization across the U.S., and DraftKings could capitalize on increasing market access.
Already, it boasts 1.5 million monthly unique players as of Dec. 31. That was up from 883,000 monthly unique players at the same time a year earlier. If more states give DraftKings access, it will have an excellent opportunity to grow that user base.
The reward could be worth the risk
The primary risks in buying DraftKings' stock are regulatory and profitability. There is no guarantee that DraftKings will be granted access to any additional markets than where it is currently operating. What's more, when existing agreements with states run their course, there is no assurance DraftKings will be able to renew.
Moreover, DraftKings is reporting massive losses on the bottom line. With each new state it gains access to, it invests heavily in sales and marketing to attract customers. The result is that it lost $1.5 billion on the bottom line in 2021 on revenue of $1.3 billion.
The market is well aware of these risks, and DraftKings stock has been down 60% in the past six months. Investors can buy DraftKings at a price-to-sales ratio of 7.4, which is near its lowest ever. The stock has the additional benefit of diversifying portfolios away from elevated geopolitical, inflation, and supply-chain risks plaguing broader markets. Overall, the rewards could be worth the risk in buying DraftKings.
