It's easy to be a bit timid when we're looking at all-time highs for the market. After all, where can investors go to find growth? Never fear, for the long-term oriented investor, there are still diamonds in the rough. One of those stocks is DraftKings (DKNG 4.96%).
This is a company that is hard to ignore. It lies within an industry that carries a long history of consumer interest, while also being something new and fledgling. The continuing expansion of states with legal sports betting gives DraftKings new potential markets, while its current markets continue to provide growth for the company. Moreover, the big premiums relative to sales that were present the last time DraftKings shares took off are no longer present.
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Strong Revenue Growth
While Q4 results are expected sometime in mid February, DraftKings' performance through the first three quarters of 2023, coupled with its guidance for 2024 indicate that the positive story here remains intact.
The fantasy sports/gambling juggernaut reported $2.43 billion in revenue through the first 9 months of the year, or a roughly 74% increase year over year, while full year guidance of $3.67 billion to $3.72 billion would represent roughly 64% growth year over year.
This marks a continuation of impressive growth rates in revenue that have occurred over the last few years, while forward guidance implies that this positive trend will continue. Fiscal 2024 guidance provided in the company's Q3 report estimated a potential 25% revenue increase to between $4.5 billion and $4.8 billion.
To keep this story going, the company needs to keep gaining users, while also getting their current consumer base to continue spending money. Most recent info seems to imply that it's happening. The company's Monthly Unique Payers increased 40% year over year in Q3 2023 to 2.3 million. DraftKings credited this to a combination of user retention, and new acquisition.
Improving Bottom Line
The big hiccup here that has plagued the company has been a lack of profitability. Yes it's a growth stock, but the last few years have included billion dollar losses as the company has poured cash into expansion. The impact of this was no more evident than when shares declined from highs of nearly $72 in 2021, to lows in the $11 range last year. Simply put, euphoria burned a lot of investors on this one.
Today, I think it's a slightly different story. Through the first nine months of 2023, the company managed to improve net losses to $757 million compared to $1.14 billion through the first nine months of 2022.
The company's expected fiscal year 2023 adjusted EBITDA is between ($95) million and ($115) million, while guidance for fiscal 2024 gives adjusted EBITDA of $350 million to $450 million. Obviously this would be a great trend in the right direction.
Investors who were patient enough to jump in on DraftKings' pullback have already been rewarded with 170% returns over the last 12 months. Assuming estimates hold true, things are trending in a much better direction earnings wise than they were a few years ago. The question becomes, is the stock still a buy after such a significant bounce back? I think the answer is yes.
When you look at DraftKings historical price-to-sales ratio, the stock is still trading much lower than it was. In 2020, the stock was trading at nearly 40 times sales, a much higher multiple for investors. Today, even after its rebound in share price, it is trading closer to 5.5 times sales.
Well Positioned Within the Industry
Early birds do tend to get the worm. DraftKings and Flutter Entertainment (FLUT -0.99%), owner of FanDuel, have been duking it out for years now, trying to get the edge on sports betting.
A report back from Eilers & Krejcik Gaming in October showed that DraftKings had taken the lead in terms of market share at 31%, compared to FanDuel's 30%. It's worth noting that this comparison includes other forms of gaming and gambling as well, not just sports betting, in which FanDuel still carries the lead.
As one of the leaders in this industry, I think DraftKings stands to continue to be the beneficiary of a growing gambling market. According to Statista, projections are that online sports betting revenue will increase from $7.62 billion in 2023, to nearly $16 billion by 2028.
The company is producing solid growth, while reigning in some of the losses that have been such a headache for investors. Forward guidance looks good, and some of the largest potential markets haven't even been touched yet. California, for instance, still hasn't legalized sports betting, and it is the largest economy in the U.S., with around 39 million people.
Now that its price-to-sales is more realistic, the current trading range for DraftKings seems to leave upside potential for investors as long as the company continues current trends.
