DraftKings Stock Down 26% in January – Time to Buy DKNG Stock?

The price of DraftKings stock is down 26% so far this month as an expected deterioration in macro conditions continues to weigh on the valuation of top growth stocks and pandemic winners.

However, just yesterday, the price of DKNG stock rose more than 5% during a volatile session that saw the stock rising as much as 18% at some point during the day after Morgan Stanley upgraded it from equal-weight to overweight while maintaining its price target of $31 per share.

The American investment bank deemed DraftKings as a “leading market share player” in the growing iGaming market while emphasizing the stock’s appeal at current levels.

“[New York] results on Friday remind us that the US sports betting/iGaming market is likely to be very large, with only a handful of market share winners. We expect DKNG to be one of them, and with sentiment at an all-time low on near-term loss concerns, we see now as a good time to invest for the long term”, stated Morgan Stanley’s analyst Thomas Allen in a note to clients sent yesterday.

DraftKings is expected to report its financial results covering the fourth quarter and full 2021 fiscal year on 18 February and the markets will be waiting to see how the gaming company has fared in the midst of a potentially fading pandemic tailwind.

What could come next? In this article, I will be assessing the price action and fundamentals of this gaming stock to outline plausible scenarios for the future.

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DraftKings Stock – Technical Analysis

Back in December when I last wrote about DraftKings stock, I maintained the bearish short-term price target I had set forth months ago as all indicators pointed to the continuation of the downtrend that started on September last year.

That target has already been hit as the stock has reached the low 20s and this calls for a reassessment of the situation.

As of yesterday, DKNG stock is trading 73% below its 52-week high and 55% below the 200-day simple moving average, which emphasizes how far the market’s overall negative sentiment toward growth stocks has gone.

Yesterday’s trading volumes were particularly high as they exceeded the 10-day average by more than 3 times. The fact that the price settled way below intraday highs means that sellers showed up to get rid of millions of DKNG shares and that is not a good sign for the short to mid-term outlook.

Despite this uptick, the stock remains on a downtrend unless a break above the descending price channel shown in the chart occurs and, even if that happens, there are many areas of resistance that DKNG will have to overcome if a post-earnings rally is set to take place.

Momentum indicators are favoring a short-term bullish outlook as there is a slight divergence in the Relative Strength Index (RSI) although the MACD remains neck-deep into negative territory and below the signal line.

Moving forward, the outlook remains bearish as bullish signals are too weak. A technical bounce could occur at this point but the odds keep favoring the continuation of the current downtrend.

DraftKings Stock – Fundamental Analysis

The valuation of DraftKings has come down to earth rapidly and that calls for a reassessment of its merits as a potential long-term investment.

In this regard, the company’s forward price-to-sales ratio has come down from the high 30s to just 5x as of yesterday and that is a way more reasonable multiple for a company like DKNG – an early-stage business with poor fundamentals but huge total addressable market.

During the first nine months of 2021, revenues for DraftKings more than doubled moving from $292.3 million to $822.7 million amid the tailwind that the pandemic provided to the firm’s business model and the ongoing legalization of sports betting in the United States and other corners of the developed world.

However, operating losses accelerated from $574.9 million to $1.19 billion as scaling up remains a costly endeavor for the firm.

As I have stated multiple times, the management’s decision to make a reckless bid for Entain Plc for $22 billion is the most discouraging factor from a fundamental perspective – numbers aside.

In addition, DraftKings is still cash-flow negative. The company burned around $300 million in the first nine months of 2021 while its cash reserves stood at $2.9 billion.

Even though the firm’s solvency is not in question, the feasibility of the business model is as the company’s negative profit margins keep increasing even though sales are growing fast.

Yes. The prospects of the business are quite promising. However, the fundamentals of the company are not attractive at all and even though its total addressable market is huge that doesn’t necessarily mean that the business can deliver the kind of profitability that justifies an $8.3 billion valuation.

With this in mind, even though DraftKings may continue to report rapid sales growth in all upcoming quarters, unless the business’s bottom-line performance and cash burn improves, the company remains a very risky bet in a promising market.

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