All bets are off on DraftKings (DKNG 1.76%) at this point; the online gaming stock has been through it all. The pandemic fueled massive growth for the company as consumers were forced to shift to mobile platforms in order to place their bets. As a result, DraftKings went on a massive bull run with the stock price extending beyond $70 in early 2021.
It's hard to believe this happened when noting the company's situation today. In the past six months, DraftKings stock has plunged 70%, a monumental decline compared to the S&P 500's negative 8% return over the same time frame.
Due to astonishing inflation, rising interest rates, and fear linked to Russia's invasion of Ukraine, the stock market has been in a muddle of late. Consequently, investors have abandoned high-growth companies that are not yet profitable or cash-flow positive.
During periods of economic uncertainty, it's very common for investors to exit positions in speculative stocks and transition over to safer assets. That is precisely what we're witnessing with the ongoing sell-off in DraftKings shares. Even after the stock has shed nearly three-quarters of its value, investors shouldn't jump to buy it quite yet. Let's examine the primary concern involving DraftKings' business model as it stands today.
Growth has been solid
On the surface, DraftKings appeared to have a phenomenal year in 2021. The company reported a top line of $1.30 billion to close out the year, translating to a robust 111% year-over-year increase . Over a three-year span, revenue has expanded at a compound annual rate of 79%, representing a string of several successful growth periods. Next year, Wall Street analysts are modeling for sales of $1.98 billion, equal to 53% growth from a year ago.
As you see, growing sales hasn't been a problem for the online gaming leader. Besides FanDuel, which is under the Flutter Entertainment umbrella, DraftKings has captured the largest piece of the online sports betting (OSB) market in the United States. Today, DraftKings reigns over nearly one-third of the OSB industry, placing the company in an advantageous position to grab more share as states continue to legalize online gambling.
But there is one major caveat
Unfortunately for DraftKings, the company has had to shovel out a lot of money in order to grow its business. It spent $981.5 million on sales and marketing in 2021, equal to 98% growth year over year and 76% of total revenue. Altogether, DraftKings' operating expenses increased 96% from a year ago, totaling $2.9 billion. The company is investing more than two times its sales in order to develop its business. This could prove to be a wise choice in the long run, but it surely appears risky today.
The major spending, as you might imagine, has resulted in significant losses. The company ended the year with an adjusted loss of $676.1 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), an almost twofold increase in its loss from 2020.
Management doesn't plan to loosen up on its spending in the foreseeable future, either -- the company is guiding for an adjusted EBITDA loss between $825 million and $925 million this upcoming year, implying an even greater loss than its most recent period. As the online gaming market adds more participants, investors should wonder about DraftKings' ability to achieve positive net income. After all, the company is running backwards on the road to profitability at the moment.
Buy at your own risk
DraftKings is the epitome of a high-risk investment. The company's top-line growth has been terrific, but that represents only one piece of the puzzle. Its steep investments in advertising have brought forth monstrous losses, and since the company plans to keep spending to expand its operations, there are no signs of turning the corner anytime soon.
Investors should stay on the sidelines for now -- there are plenty of other high-growth stocks with more favorable risk-reward ratios in today's market.