DraftKings (DKNG 4.61%), a digital sports entertainment and gaming company, has become a unicorn this month. While growth stocks have largely faltered in February due to "sticky" inflation, shares of the online gaming company have soared by 24.6% so far this month.
Even more impressively, DraftKings' stock has climbed by a stately 80.3% since the start of 2023. The Nasdaq Composite, by contrast, has only gained 12.6% this year after its sharp correction in 2022.
Can this red-hot growth stock continue to clobber the broader markets? Let's break down the company's short- and long-term outlooks to find out.
Defying the marketwide bear narrative
Why is this growth stock decoupling from the broader markets this year? Last week, DraftKings released its fourth-quarter 2022 earnings report and 2023 financial outlook. This latest earnings report showed that the company is attracting new users at a rapid clip, increasing the revenue per user at a steady rate, and, perhaps most importantly, lowering its fixed costs in mature markets.
DraftKings also raised the midpoint of its 2023 revenue guidance to $2.95 billion, an increase of approximately $10 million over its prior estimate. This modestly higher annual revenue guidance reflects the company's near-term commercial opportunities in newer markets like Maryland and Ohio.
These encouraging financial figures, however, don't fully explain DraftKings' meteoric rise this year. After all, the company is still cash-flow-negative in a big way. Underscoring this point, DraftKings' latest forecast calls for its cash position to fall by approximately $600 million over the course of 2023. Cash-flow-negative growth companies, on balance, have fared poorly over the prior 18 months due to rising interest rates and hot inflation.
What's powering DraftKings' stock higher in this unfavorable economic environment? The key driver behind the company's soaring share price in 2023 is simply that its business appears immune to rising interest rates and stubbornly high inflation levels.
For instance, despite the steep erosion of consumer spending power in recent times, DraftKings' annual revenue grew by a staggering 81% year over year to $855 million in the fourth quarter. While a fair amount of this blistering top-line growth stemmed from the launch of its Sportsbook and iGaming offerings in newly legalized markets, the economically insensitive nature of its core business is also a key component of this parabolic growth trend.
Where is DraftKings stock headed?
Wall Street's average fair value estimate implies DraftKings' shares have now closed their latent valuation gap. In other words, the stock is expected, essentially, to trade sideways for the remainder of the year.
Most analysts, however, were dead wrong about this stock ahead of its Q4 earnings report. Speaking to this point, most financial firms had "neutral" to "sell" ratings on DraftKings' shares heading into Q4 2022 earnings. Keeping with this theme, Starmine's Equity Summary Score on DraftKings' stock was "very bearish" before the company's market-crushing rally in February.
What did analysts miss? While there aren't enough details in the publicly available analysts' notes to nail down a satisfying answer to this question, the likely culprit is the market's clear disdain for cash-flow-negative companies in the current environment. DraftKings, in short, was seemingly expected to trade in lockstep with this cohort of equities in 2023.
Can DraftKings stock continue to swim against expectations? There are two ways to look at this question. In the short term, DraftKings' equity may struggle to churn higher due to the inherent seasonality in its business.
After all, Q4 tends to be the company's strongest period as a result of the overlap in the NFL and NBA seasons. As a result, the online gaming and entertainment pioneer may be unable to deliver another blowout quarter in the near term, which may slow the upward momentum in its shares.
That being said, the long-term trend is definitely on DraftKings' side. The company operates in one of the world's fastest-growing industries and has established strong brand recognition across most of its markets.
Bottom line: DraftKings stock may level out over the next two quarters as seasonality comes into play from an earnings standpoint. But this online gaming play ought to be a big winner for shareholders over the next few years due to the industry's stellar growth trajectory and DraftKings' proven ability to attract and, subsequently, retain customers.
