If you have been thinking about picking up a few shares of DraftKings (NASDAQ: DKNG), analysts would advise you wait for now, as they have given the stock a [Moderate] BUY rating after it fell more than 12% in premarket trading this last week. The surprise slip came after the online sports betting firm reported smaller-than-expected losses despite higher-than-expected revenue.
All of this resulted in DraftKings tumbling 27.8% by the close of day on the first Thursday in November, which is the stock's biggest single-day drop since forming—and trading as—an SPAC, in 2019. Unfortunately, this adds to their existing troubles, as the stock was already down more than 55% year-to-date (YTD). On a 12-month basis, though, the stock remains down -72.44%.
By comparison, the Russell 1000 index is only down -20% YTD and more than -25% on the year, while the Standard & Poors 500 is down nearly -20% YTD and a little more than -18% on a 12-month basis.
Earnings are Down but Sales Have Upward Momentum
Indeed, DKNG's current Earnings Per Share (EPS) is -$0.57 on sales of $801.1 million. However, analysts have estimated the next price target to be $24.38. Since the next reporting date is February 17, 2023, DraftKings has quite a bit of time to make up that difference.
Fortunately, sales have been growing every year since the stock's 2019 IPO. It just so happens that new, unique users did not expand at the rate they had estimated. Specifically, the company failed to add enough unique monthly customers to satisfy analyst projections, falling about 400,000 short of the 2 million they wanted. This led to customer growth also falling, to 22%, down from 30% in Q2 and 29% in Q1.
Despite user engagement slipping the past two consecutive quarters, though, earnings have remained somewhat stable, though still down. Of course, it is important to note that actual earnings for Q1 and Q2 of this year were in the red but they did improve from -$1.08 to -$0.50 in that time frame. Although EPS dropped back to -$1.0 in the most recent quarter, reported earnings have either met or beat the estimate over the last 12 months.
Perhaps a better measurement of the stock's health is a comparison between annual sales and earnings growth. While sales consistently beat the estimate (and range) in both 2019 ($431.8 million vs $415.0 million estimate and range high) and 2020 ($643.5 million vs $551.1 million estimate and $568.0 million range high), it met both the estimate and range high of 1.3B last year. So, yes, sales are slowing, but that doesn't change the fact that sales are still increasing.
Competition is Close Among DraftKings' Peers
While DKNG may be struggling right now, its current movement is not too different from the broader industry and market. For example, DKNG peer TakeTwo Interactive (Nasdaq: TTWO) also has a [moderate] BUY rating with a share value also in the bottom 10% of its 52-week range.
But this is probably the only factor these two stocks have in common, even though they have the same rating. Obviously, many of DKNG's measures are in the red (net margin, Return-on-Equity, and Return-on-Assets are all down -99.14%, -88.80%, and -37.37%, respectively). TTWO are all positive, of course, with a range of 4.26% to 8.21%. DKNG also has a -$3.43 Price-to-earnings ratio, against TTWO's $1.52 P/E.
International Game Technology (NYSE: IGT) is another company in the same digital gaming space as DKNG. Their BUY rating is slightly better, even though its numbers are not, necessarily, that much better. Yes, it is sitting at a more comfortable 28% of its 52-week range with a stellar price-to-sales ratio (P/S) of 0.99 (as of early 11/8/2022), but it is the most volatile of the three stocks mentioned here, with a beta of 1.84. By comparison, DKNG's volatility is only slightly better, at 1.77, while TTWO is the least volatile, at 0.8.
All Things Considered, Moderate Buy is A Solid Rating
All three of these stocks have some kind of BUY rating, which makes sense since each of them have positive projected earnings growth. While DKNG's rating is simply “growing”— since immediate growth will likely still keep the stock in the red, for now—it has an upside of 106.6%, which is twice that of TTWO and about 50% better than that of IGT.
It may also be helpful to note that DraftKings' most direct competitor is probably FanDuel (OTCMKTS:PDYPY). While this stock is in the upper half of their 52-week range with a more favorable P/S of 2.9, their net income is significantly in the red, at -$571.77 million.
Taking all of this into consideration, DKNG's moderate BUY rating means this might be the right time to get in.