Should investors invest in DraftKings?

Sportsbooks in Nevada placed $185 million in wagers on the Super Bowl last Sunday, the largest ever for a big game at the gambling center. One of the largest online sports betting platforms in Korea DraftKings (NASDAQ:DKNG) got a lot of that action.

But after DraftKings released its earnings on Thursday, the focus is now on results. Should investors bet on DraftKings stock? Let’s take a look at its earnings and outlook to see if it’s a buy right now.

Rollercoaster Ride for DraftKings

DraftKings stock has been a juggernaut in 2023, surging 209%, and is off to a strong start to the year, up about 32% so far at around $44 per share. This isn’t all that surprising, considering the rapid growth of online sports betting in the United States and its status as one of the leaders in the field.

But the stock has not returned to 2021 levels, when it hit a high of just over $71 per share. The bear market in late 2021 and 2022 significantly damaged DraftKings’ value, bottoming out in the fall of 2022 at around $10 per share.

The company reported fourth-quarter and year-end results Thursday afternoon, reporting strong sales growth but falling short of analysts’ expectations. As a result, stock prices fell slightly on Friday morning.

DraftKings’ revenue rose 44% to $1.23 billion in the quarter, slightly below the consensus estimate of $1.24 billion. Continued expansion into new states has helped drive revenue.

In the fourth quarter, Maine approved online sports betting, becoming the 23rd U.S. state to make DraftKings available. The company added its 24th state, Vermont, in January. This expansion and efforts to improve engagement and retention helped DraftKings grow monthly unique payers (MUPs) by 37% in the quarter, to an average of 3.5 million. Additionally, average revenue per MUP in the fourth quarter of 2023 was $116, a 6% increase from the previous year.

However, the final result was much lower than expected, as DraftKings reported a net loss of $44 million, or 10 cents per share. That’s much better than the $243 million net loss in the fourth quarter of 2022, but well below the 8-cent-per-share profit that analysts had predicted. However, DraftKings reported positive adjusted EBITDA of $151 million.

The company also reported that cost of sales increased significantly by 47% year-over-year to $717 million, as well as increases in product and technology, general and administrative expenses. Of course, rising costs are not uncommon for growing companies, and DraftKings is making progress toward profitability, though not as quickly as analysts had hoped. For context, the company reported an adjusted EBITDA loss of $153 million and a net loss of $283 million in the third quarter of 2023, so it’s moving in the right direction.

For all of 2023, DraftKings reported a 64% increase in revenue to $3.665 billion and a net loss of $802 million, or $1.73 per share, down from a net loss of $1.378 billion in 2022.

More states are expected to approve sports betting by 2024.

Considering DraftKings is currently only available in about half of the U.S. states, there appear to be numerous growth opportunities ahead.

Just this year, Vermont has already approved sports betting, and North Carolina is scheduled to launch on March 11th. Additionally, DraftKings is expected to launch as an option in Puerto Rico this year. Meanwhile, another seven states, representing about 11% of the U.S. population, have introduced bills or placed referendums on the ballot to legalize online sports betting, according to DraftKings.

DraftKings raised its 2024 revenue and EBITDA guidance based on results seen in the first six weeks of 2024 and strong customer acquisition in the fourth quarter. Notably, the company raised its fiscal 2024 revenue guidance to the $4.65 range. It increased to $1 billion to $4.9 billion from the previous range of $4.5 billion to $4.8 billion. The updated guidance would show year-over-year growth of 27% to 34%.

The company also expects 2024 adjusted EBITDA to be between $410 million and $510 million. This compares to previous estimates of $350 million to $450 million. This is significant because DraftKings posted a net loss of $151 million in adjusted EBITDA in 2023.

New Acquisitions and Long-Term Expectations

Importantly, these estimates do not include DraftKings’ just announced acquisition of Jackpocket. Jackpocket is a company that allows users to play lotteries on its app. DraftKings paid $750 million for the company. Jackpocket expects to generate incremental revenue of $260 million to $340 million and incremental adjusted EBITDA of $60 million to $100 million in fiscal 2026.

Looking longer-term, CEO Jason Robins wrote in a letter to shareholders that the company will achieve $6.2 billion in revenue and $1.4 billion in adjusted EBITDA in 2026 and $7.1 billion in revenue and $2.1 billion in adjusted EBITDA in 2028 in existing states alone. He said he plans to do so. . This does not include contributions from Jackpocket or any additional states that legalize sports betting from now on.

There is no doubt that this stock has tremendous upside potential. I’m just a little cautious about a higher valuation, with the price-to-sales ratio rising from 2.6 to over 6 at the end of 2022. The consensus estimate among analysts is that the stock will remain relatively flat at current levels. Next 12 months. However, there may be a better opportunity to outperform this grower after the drop.