If you don't have billions of dollars to buy a professional sports franchise, the next best thing to do to gain exposure is to invest in industries that are derivatives of the leagues, right? Enter DraftKings (DKNG -0.22%). The online sports betting platform is still posting strong growth.
Even though the stock is up an incredible 113% in 2023, DraftKings is still off about 66% from its all-time high price of $71.98 set in March 2021. Shares currently trade at a price-to-sales multiple of 4.2, close to the cheapest they've sold for since the company went public. This presents a potential opportunity.
Here's why DraftKings is one growth stock that's down big to buy right now.
Posting impressive gains
The business certainly has some momentum on its side right now, and investors seem to notice. In 2022, DraftKings' revenue increased at a blistering 73% clip, which was a slowdown from the prior couple of years, but an impressive gain given the economic backdrop. And growth accelerated in the first three months of this year, up 84% compared to first-quarter 2022. DraftKings beat Wall Street estimates in the latest quarter, sending the stock higher by double digits after the news.
DraftKings ended the quarter with 2.8 million monthly unique payers (MUPs) and an average revenue per MUP of $92, both up substantially year over year. Launching new features, such as live in-game parlays for Major League Baseball games and a new horse-racing betting app, can help to drive new customers and greater engagement.
Management also said that the company now commands leading market share domestically in the online betting space for the first time ever. That's quite an accomplishment. Another fantastic trend to see is that older markets, what DraftKings calls "Vintage," are seeing robust revenue growth with reduced marketing spend. This means it's getting less expensive in U.S. states that the business has had a longer presence.
It's not a surprise that the executives would be overly optimistic about DraftKings' prospects. They see 42% revenue growth for 2023. This guidance was upgraded from the prior outlook thanks to the strong performance lately. If the U.S. experiences a severe recession in the near term, the forecast would be in peril. However, investors should be pleased with the company's financial results last year and in the first quarter this year, especially in the face of elevated inflation and consumer confidence at historically low levels.
Keep the bottom line in mind
Having businesses in your portfolio that are registering stellar growth is one possible way to generate outperformance in the stock market. But along with DraftKings' strong momentum, there are some risks to be mindful of as well.
The most important negative trait, I think, is the fact that the company is unprofitable. Cumulative net losses over the past five full fiscal years totaled a whopping $4.4 billion. To provide some context, the entire market cap of the company is just over $11 billion today. That's definitely not an insignificant amount of losses.
The promise is that with greater scale, DraftKings will be able to achieve positive profits. In the most recent quarter, the operating loss shrank year over year, clearly a positive sign. With higher revenue, it's encouraging to see the business getting closer to breakeven. In fact, management believes DraftKings will hit positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fourth quarter this year. Because of how easy it is to manipulate this metric, shareholders should still temper expectations.
But for those investors who care more about the growth potential of a disruptive company like DraftKings, one that is well-positioned to continue its outsized gains in the future, owning shares makes sense. Wall Street thinks the company can reach close to $6 billion in annual revenue in the year 2027, up from $2.2 billion last year. By entering new markets, attracting more customers, and introducing new product features, DraftKings is well on its way to continue dominating the industry.
