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Growth stocks tend to outperform the broader markets in a bull market. But they trail indices significantly when markets enter bear market territory. But if the fundamentals of a company remain solid the sell-off provides investors an opportunity to buy quality stocks at a discount.
DraftKings (NASDAQ: DKNG) is one such stock. The digital sports and gaming company’s stock has taken a hammering in 2022 losing almost 60% to date. However, we believe that the stock has been severely oversold. Its earnings numbers speak for themselves.
Draftkings Q1 earnings
DraftKings numbers for Q1 of 2022 were strong. The company reported revenue of $417.2 million in Q1, an increase of 34% year-over-year. However adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss widened to $289.5 million compared to a loss of $139.2 million in the year-ago quarter.
However, when you look at the company’s future prospects, the losses seem par for the course. It improved revenue guidance for the whole year of 2022 from $1,925 million to $1,975 million. The company’s monthly unique payers came in at 2 million and they spent $67 on an average compared to 1.5 million users in Q1 of 2021 who spent $61. With time, these numbers will continue to increase and EBITDA numbers will improve.
DraftKings has said that it expects the online sports betting and iGaming market in North America is estimated to be in the range of $67 billion to $70 billion. The company also increased its long-term adjusted EBITDA outlook to $2.1 billion.
A combination of macro factors will drag DKNG stock lower
High inflation: Inflation has come in at 8.6% for May 2022. That’s a four-decade high. From the looks of it, inflation is not going to go away anytime soon. A Reuters report quoted Cleveland Federal Reserve Bank President Loretta Mester saying that inflation will take two years to fall to the US Federal Reserve’s target of 2%. She said it will gradually move down from the current level as costs of fuel and transportation are expected to remain high.
Ongoing Russia-Ukraine war: NATO Secretary-General Jens Stoltenberg told the BBC that the West should be prepared to support Ukraine against Russia for many years. He said “the costs of war were high, but the price of letting Moscow achieve its military goals was even greater.” Clearly, oil and food prices aren’t going to come down anytime soon.
Rising interest rates and a possible recession: The US Fed has said that its commitment to controlling inflation is “unconditional”. Interest rates will continue to rise. And this could mean a recession is in the offing.
However, DraftKings is a sin stock that will ensure that people continue to gamble from home instead of spending money at a casino hotel.
One important factor to keep in mind is that DraftKings needs state approval to expand its business. Right now, it is live in 17 states for mobile betting and its iGaming offering is live in just 5 states. All the numbers that you see come from less than 40% of the US population. The company is pushing hard for legalization across the country. It is more likely that it will get approved in more states and its tax revenues are just too precious to be ignored.
The stock closed at $12.85 on June 22. DKNG has an average analyst target price of $28.02, a potential upside of over 120%. The stock is prepped for growth and should be on the radar of investors who want to invest in heavily discounted growth companies.
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