DraftKings Is on the Path to Profitability. Will Its Stock Follow?

From building a social community to a video content platform, DraftKings (NASDAQ: DKNG) is looking long-term with many projects in the works. In this clip from “IPO & SPAC Show” on Motley Fool Live, recorded on April 11, Motley Fool contributor Jose Najarro discusses the growth opportunities for DraftKings both in the United States and globally, along with the drawbacks of being a cost-heavy business.

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Jose Najarro: DraftKings’ IPO date was April 24 as ticker DKNG on the NASDAQ, but this originally started as a SPAC. Right now, some highlights from DraftKings. This is a company that deals with online sports betting, just online gambling in general. There’s a big difference between mobile sports betting, online sports betting, and the iGaming casino. Just because your state legalizes one, doesn’t mean they legalized the other. For example, right now, mobile sports betting is legal in the United States in 17 states, which represent about 36% of the United States population. iGaming, which is like their online casino, is only legal in five states. That represents about 11% of the United States population. Some pretty cool highlights for DraftKings, is first they are building more of a social community within their application. They want to be able to make DraftKings a fun experience, say, if you win money you want to share with people who may follow you or like what you’re doing. Hey, I just won X amount of dollars on a bet. Hey, I just played this casino game and it’s doing pretty well. They’re creating a social community. Another thing that they’re doing, which is pretty, I want to say, interesting, it might be pushing some people away, is they are entering in this Web3 and NFT technology. DraftKings has partnered with Autograph, which is a company that works with athletes to create digital collectibles. It has some form of backings if DraftKings make some NFTs. For example, they’ve created some with Tom Brady, with Tony Hawk, with Tiger Woods, and so many big names. They are creating digital collectibles. They partnered up with the NFL recently to create some form of blockchain, stout game. It’s still very early to mention and it’s not showing anything in the revenue side for DraftKings, but it just shows that, hey, they are focusing on this technology. The real question is, is this just a waste of money, or is going to amount to something? I think that’s going to be a risk later on. They’re also building a video content platform. They made a few acquisitions that deal with media and entertainment. It seems like they also want to provide some form of media outlet for their consumers. Again, it does seem like they’re probably hitting a lot of things at once, which maybe some investors might think that’s great. Other investors might be, hey, you’re trying too much at the same time. They’re also in the process of acquiring Golden Nugget (NASDAQ: GNOG). They’ve gone through the process, but that’s taking a little bit longer than intended. One of the biggest risks I want to say for DraftKings is one, this is, I want to say a very competitive market. There are huge casinos everywhere. The second thing is, it is a very high cost of entry when introducing in new states. I believe they just got introduced into New York and the amount of money that they burn to just make sure they’re probably one of the best ones in New York is pretty high. I believe there’s even certain casinos and certain other online players that were like, no, this is actually too cost-heavy for us to even attempt to do too much advertising in New York State. Definitely, it’s a high cost of entry. If we take a quick look at their fourth-quarter results, revenue was about $473 million, up 47% year-over-year. They also recently launched, like I mentioned, in New York and Louisiana. In 2022, there’s 10 states legislators that have introduced the legislation to legalize mobile sports betting and three states have introduced iGaming legislation. There is still plenty of growth opportunities just within the United States. Obviously, there’s also global growth there. But like I mentioned, it is a heavy competitive market. They are doing new things to improve live betting and quick betting experiences. Things like, for example, if you want to just bet on who is going to score the next point in whatever game you’re watching, that has to be done in something with very low latency, something that has to be done in real-time. DraftKings is introducing that. At the moment, unfortunately, DraftKings is not profitable and is not positive in cash flow from operations, but they do expect to be adjusted EBITDA profitable in Quarter 4 of 2023. Again, this is a very, I want to say heavy cost market, especially during entry times. I do have DraftKings in my portfolio, one that I don’t mind holding, but it’s not one that I’m constantly running to add into. It’s one that I just want to have some exposure because I do believe maybe some of these innovative tricks that they’re doing has the optionality and opportunity to maybe go into a bigger direction. At the same time, a lot of heavy risks that would limit my exposure to this company.

Jose Najarro owns DraftKings Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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