DraftKings (NASDAQ:DKNG) stock seems to have peaked with its recent drop from its 52-week highs. DraftKings stock has tumbled 15% since hitting a high of nearly $45 on June 1.
The mobile sports betting company has enjoyed a stellar run since going public via a reverse merger in late April, rising more than $29 per share from its $10 start. That is the price when the reverse deal was announced with another public stock, Diamond Eagle Acquisition, in late 2019.
DraftKings now has a $12.3 billion valuation. This represents over 17 times revenues, which are expected to be only $718 million next year, according to Seeking Alpha. As for profits, or even just EBITDA cash flow, that is not in the cards for a good while.
Valuation Is Based on Distant Profits
For example, the company projects it can reach $1 billion in EBITDA. But, according to Barron’s, management has not yet said when that could be attained. Barron’s says analysts generally agree that it won’t be until the end of 2025. That is effectively five and a half years from now.
The problem is that DraftKings is operating in seven states and only seven others have authorized online gaming. The company, however, has clearly shifted from a fantasy sports operation to full mobile sports betting.
In fact, Barron’s recent article points out that management is going to spend a lot of effort to increase in-game betting. This involves setting up and accepting prop bets, or propositions. For example, who will win the coin toss at the start of a football game? Barron’s says that is its No. 1 prop bet now.
So, in over five years, the stock (if it does not rise between now and then) will still be a high ratio of 12 times EBITDA. Take its $12.3 billion market value and divide that by the $1 billion in 2025 forecast EBITDA cash flow.
That ratio would be a high number even if the company was going to make that amount of money next year. Investors are likely going to have to wait a good while for the stock to appreciate significantly from here.
DraftKings Stock Has Its Fans
Sports betters are more than ebullient about DraftKings. They see basketball starting up, including football and baseball. They believe that fall sports will induce a lot of people to gamble in the second half of the year.
For example, here is a typical YouTube blogger who prophesizes that DKNG stock will rise to $80 to $100 per share. He talks about the company’s growing average revenue per user, and its rising monthly unique players. He talks about new igaming exchange traded funds that are coming out that might push people to buy the stock.
But not one word about its stratospheric valuation. He even estimates that the market will value it at $20 to $23 billion in several years if up to 35 state governments open up online gambling. His thinking process is typical of millennial investors. They like this kind of stock whose apps they use in their daily lives.
What To Do With DraftKings Stock?
It is true that the fall sports re-opening could end up pushing the stock’s valuation even higher. I am not denying that possibility. But over the longer term, the investor at today’s prices is making a basically irrational decision.
Unless there is evidence that mispricing is still occurring with the company’s long-term prospects, the intelligent investor will look elsewhere.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.