DraftKings Stock Down 22% in December – Time to Buy DKNG Stock?

The price of DraftKings stock has declined more than 22% so far this month following the weakness experienced by growth stocks as a whole amid concerns of an earlier-than-expected interest rate hike from the Federal Reserve.

The market seems to have adopted a risk-off attitude ahead of last Wednesday’s FOMC meeting and that pessimistic sentiment seems to continue to dominate the narrative for stocks in up-and-coming spaces as the US central bank announced that it will taper its asset purchase program more aggressively in 2022.

In this context, valuation-rich companies like DraftKings, which was trading at a forward price-to-sales multiple of 32x back in February this year, have suffered the most as a strong compression of trading multiples has led to a sizable decline in the stock price.

What could be expected from this sports betting stock as we are heading to the beginning of what promises to be an interesting year for the markets? In this article, I’ll be assessing the price action and fundamentals of DraftKings stock to outline plausible scenarios for the future.

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DraftKings Stock – Technical Analysis

In my latest article about DraftKings, I highlighted that one scenario for the stock was that a break below the $35 threshold could lead to a sizable decline toward the low 20s.

That scenario played out nicely as the price has continued to dive to those levels even though it is now encountering support at $27 – another relevant horizontal threshold from a technical perspective.

Thus far, the price of DraftKings is standing 64% below its 52-week high of $74 per share while it is also trading 47% below its 200-day simple moving average. Moreover, the stock has moved below its short-term moving averages.

Moving forward, momentum indicators may be signaling what could come next for the stock. In this regard, the Relative Strength Index (RSI) and the MACD seem ready to post a higher low despite the price declining further.

This could result in a technical rebound in the short term. However, the mid-term outlook continues to be bearish unless a break above the 50-day simple moving average occurs in the following weeks.

In this regard, the company’s fundamentals may play a more important role in shaping the price of DraftKings stock next year as the market seems unwilling to push trading multiples to the levels seen earlier this year.

DraftKings Stock – Fundamental Analysis

For DraftKings stock, the firm’s future financial performance could progressively play a smaller role in shaping the company’s valuation as macroeconomic conditions seem to be dominating the narrative at the moment and may continue to next year.

In this regard, the Federal Reserve’s decision to fully taper its asset purchases by the end of the first quarter of 2021 or somewhere around that time will mark the first milestone in what is considered a major policy change.

After that, the Fed expects to hike interest rates at least three times next year and it could also reduce the size of its balance sheet either by selling some securities it holds or by simply letting them mature.

For risky companies like DraftKings – whose operating results have been and are expected to continue to be negative in the future – this macro outlook is not favorable and its valuation multiples may continue to decline if the Fed keeps tightening its monetary policy.

Right now, the stock is trading at 6 times its forecasted revenues for 2022. Even though this multiple is 5 times lower than the 2021 peak of 32x, it is still a bit stretched considering that DraftKings has not displayed a clear path to profitability.

This year, the company may end up burning over $400 million in cash. At that annual burn rate, the firm’s reserves of around $2.4 billion may suffice to keep it afloat despite its strong operating losses.

However, a few months ago, DraftKings attempted to acquire Entain Plc for a total of $20 billion. That move was not viewed positively by the market since, in my view, it speaks a bit negatively about the senior management’s strategic approach as the deal would have diluted shareholders significantly.

With this in mind, even though the latest multiple compression may have made DKNG stock cheaper than it was earlier this year, I still see it as a risky bet unless its financial performance changes radically.

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