DraftKings Stock Down 25% in November – Time to Buy DKNG Stock?

The value of DraftKings stock has declined nearly 25% so far in November following the release of the firm’s financial results covering the third quarter of the 2021 fiscal year and the collapse of a deal to buy the British sports betting firm Entain (ENT).

On 5 November, DKNG reported revenues of $213 million resulting in a 60% year-on-year increase. This figure missed analysts’ consensus forecast of $238 million for the period as compiled by Capital IQ.

Meanwhile, the American sports betting company reported adjusted diluted losses per share of $1.35 compared to $1.11 it shed the previous year and wider than the $1.06 per share analysts had forecasted for Q3 2021.

The management also set forth guidance for the 2022 fiscal year, with revenues being forecasted to land between $1.7 and $1.9 billion in line with Wall Street’s estimates.

The fact that DraftKings missed on analysts’ forecasts for both revenues and earnings appears to be the reason behind this pronounced decline in the company’s valuation this month.

Moreover, the company’s negative operating margins remain quite high above 250% while the company’s cash burn remained above $300 million during the first nine months of 2021 amid the continuous acquisitions of other businesses and the firm’s elevated net losses of $1.2 billion during the period.

What can be expected from DraftKings now that we are heading to the last few months of 2021? Let’s have a look at the price action and fundamentals of this sports betting giant to outline plausible scenarios for the future.

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DraftKings Stock – Technical Analysis

In a previous article about DraftKings, I mentioned that the lower bound of the symmetrical triangle shown in the chart could act as support for the decline that was taking place back then following the firm’s announcement regarding the potential acquisition of Entain.

However, this support area failed to hold and this led to a collapse in the share price in November. Now, the price just tagged a major horizontal support area at the $35 level during yesterday’s stock trading action.

This latest decline of DraftKings stock has been quite pronounced as reflected by momentum indicators. In this regard, the Relative Strength Index (RSI) is stepping on oversold levels for the first time since May this year at 22 while the MACD is diving to its lowest levels since then as well.

There are two scenarios to consider now that the price is tagging this crucial support:

1. A technical rebound could take place as the sell-off may have gone too far already and some market participants may feel that the current $14 billion valuation makes more sense.
2. The decline could accelerate if the price breaks below the $35 threshold. In that case, the next support areas to watch would be found at $30 and $28. After that, nothing stands in the way for DKNG stock to drop to the low 20s.

DraftKings Stock – Fundamental Analysis

By the end of September, DraftKings had a total of $2.4 billion in cash and equivalents that should be enough to sustain the firm’s estimated annual cash burn of around $500 million for many years.

That said, even though sales are growing rapidly, the company’s profitability is not improving at all as indicated by its rather elevated negative operating margins.

Using the firm’s revenue guidance of $1.9 billion for 2022, DraftKings is being valued at 7 times its forecasted sales. Even though this multiple seems low, it is important to consider that the firm’s path to profitability is unclear.

DraftKings reported 1.3 million monthly unique payers (MUP) during the third quarter of 2021 and generated average revenues per MUP of $47 per month during the third quarter. If we annualize that figure, it gives us $564 spent per user on average per year.

Based on the firm’s user-related metrics, every DraftKings monthly active payer is being valued at almost $11,000 even though they are only bringing $564 in revenues per year for the firm.

Overall, the firm seems grossly overvalued as it would have to scale up its user base significantly while also finding a way to trim losses significantly to justify its current valuation.

With this in mind, the downside risk for this stock is quite high and the latest decline indicates how quickly market sentiment toward the stock can change if the company’s financial performance misses the optimistic scenarios set forth by Wall Street.

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