1 More Reason To Avoid DraftKings
Two months ago I showed you several reasons why you should Avoid DraftKings Stock.
Today I show you 1 More Reason To Avoid DraftKings.
You can read the original full article above.
But if you don’t want to; here’s a quick recap of why I said you should avoid DraftKings.
DraftKings entire busines model relies on sports being played so you can wager money on them in various ways.
Plus, on top of this DraftKings announced that it lost $72 million in the 1st quarter of 2020 due to lower wager volume on sporting events as the pandemic began.
In the first quarter before the lockdowns began, MLS, NBA, and the NHL were all playing games still.
Its 2nd quarter results are likely to be far worse since most sports still aren’t being played.
And now people are speculating in its stock massively with things like the Robinhood trading app.
Since its IPO in 2019 at $10 per share, it’s now selling at $35.75 per share as of this writing.
This is an increase of 258% increase in a matter of months. And most of this time DraftKings is earning $0 revenue due to sports being postponed or cancelled.
To further illustrate the insanity going on in DraftKings stock right now, in the full year of 2019 it earned $323.4 million in revenue… For the full year.
As of this writing its market cap is $12.7 billion.
This means its selling at a price to sales (P/S) ratio of 38.2.
And this isn’t even profits or cash flows which is the way most businesses are valued.
I can’t even show you those metrics for DraftKings because its unprofitable on both a net income and free cash flow basis.
Normally only high-tech startups that have the potential to transform the world are valued on their P/S ratio… And even then, a ratio of 38.2 is absurdly high.
This makes no sense by itself… But when you throw in the company is likely earning close to $0 revenue and its stock keeps going straight up… It makes even less sense.
The gambling going on in DraftKings stock is absurd right now. And I recommend you stay away from its stock.
This thesis of DraftKings continuing to flounder proved out more on August 14th, 2020 when it released its most up to date financial info.
- Revenue was only $71 million in the 2nd quarter while most of the US and world was locked down – including sports – dealing with the coronavirus.
- Operating income was negative $160.4 million due to continued costs but far lower revenue due to no sports going on.
- And earnings per share was negative $0.55 per share in the quarter due to the same reasons.
And yet the share price of its stock is up slightly since I last told you about DraftKings on July 23rd, 2020.
From $35.17 per share to $36.20 per share as of this writing. Or an increase of 2.9% in a month and a half.
Why has the stock continued rising even though its last quarterly results were terrible?
- Continued speculation in the stock – this is still a huge negative.
- Sports are now being played again – with the largest and most bet on sport of the NFL starting this week.
- Michael Jordan invested in DraftKings.
The last two things on the list are the most important positives since the last time I told you about DraftKings.
Revenue will begin picking up now that most sports are back and active… But this is especially true now that the NFL starts again this week since this is by far the most popular sport in the US.
And its also by far the most bet on sport in the US.
This will help generate more revenue for DraftKings.
Arguably the just as big announcement that Michael Jordan “acquired” an equity interest in DraftKings in exchange for becoming and advisor and board of director member to DraftKings.
I put acquired in quotations above because while the full financial details of this agreement haven’t come out yet, it looks like Michael Jordan is getting this stock from DraftKings without having to put up any cash of his own.
He’s getting these shares in exchange for advising the company.
In other words, he’s not having to pay for the stock himself.
Good for Michael Jordan.
Possibly good for DraftKings depending on the kind of advice given by the greatest basketball player of all time.
Probably not good for DraftKings shareholders in the short term if this came from issuing more shares and diluting shareholders.
Of course, having a sporting icon on board is great… But it doesn’t mean you should invest in the company just because he is.
In fact, you should still stay away from DraftKings stock for all the reasons mentioned in the earlier article.
- There is still far too much speculation going on in DraftKings stock.
- Its still far too overvalued.
- And there’s still far too much uncertainty in the realm of sports continuing – and DraftKings generating revenue and profits from these events – to consider investing in its stock right now.
Even with a sporting icon joining the company.
For these reasons continue avoiding DraftKings stock… Even though Michael Jordan invested in it.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.
P.S. I didn’t say betting or gambling when it came to DraftKings operations because its not treated as a gambling operation. Its treated as a wagering operation.
This is a slight but important difference when it comes to regulations.
And its also truly how DraftKings’s operates as well.
For example, depending on the game mode, you can pick a team of players for that weeks NFL games by paying say $5.
If the team of players you picked scored the highest amount of points in the given game you win a huge cash prize from the other people who wagered and lost.
While other players who finished behind you split a part of the remaining money based on their placement.
This is how the business model is different than gambling.
A huge part of the money is paid out to players no matter what based on how many points they scored and where they placed.
Where in gambling almost all the money is lost and goes to the casino no matter what game you play. Of course, unless you win.
Yes, these are simplified examples, but I wanted to explain the main difference here between wagering and gambling because it’s important to understand.
This difference is also why DraftKings is legal in many states while gambling is not.