DraftKings Inc. (NASDAQ:DKNG) is Building Growth on the Excitement of the First Post Pandemic Sports Season

This article was originally published on Simply Wall St News.

DraftKings Inc., ( NASDAQ:DKNG ) has been steadily growing its user base by 29% in 2020 and 13.8% in 2019. They had approximately 883 thousand average monthly unique payers (“MUPs”) in 2020, 684 thousand in 2019 and 601 thousand in 2018.

Since 2020 was impacted by the pandemic, sports events were shut down and the company relied mostly on old “Fantasy sports'' for revenue. However, the events are now open and people will have the opportunity to re-engage in the excitement, which will put DraftKings back on track.

The business has built in seasonality based on the relative popularity of certain sports. Although sporting events occur throughout the year, users are typically most active in the fourth quarter due to the overlapping calendars of the NFL and NBA seasons, which are DraftKings’ most popular sports. This means that the biggest growth spike investors should pay attention to is the last quarterly results of 2021, which will give a better picture for the direction in which DraftKings is headed.

Alternatively, more reliable metrics for this company are trailing 12 month revenue numbers because this helps investors monitor longer term trends and better account for seasonal effects such as popular sports events.

Current performance is still important, and shareholders of DraftKings will be pleased, given that the stock price is up following its latest quarterly results.

Revenues of US$312m crushed expectations, although expenses also blew out, with the company reporting a statutory loss per share of US$0.87, 92% bigger than analysts expected. The analysts typically update their forecasts at each earnings report, and we can judge from their estimates whether their view of the company has changed or if there are any new concerns to be aware of.

While expenses have contributed to the increase of net loss from US$-173.9 Million in 2019 to US$-1.2 Billion in 2020, this is expected for a young high growth company that is investing in the future.

We've gathered the most recent statutory forecasts to see whether the analysts have changed their earnings models, following these results.

View our latest analysis for DraftKings

Nasdaq:DKNG Earnings and Revenue Growth, June 2021

Taking into account the latest results, the consensus forecast from DraftKings' 23 analysts is for revenues of US$1.17b in 2021. The loss per share is expected to greatly reduce in the near future, narrowing 33% to US$-2.82.

The consensus price target was unchanged at US$68.89, suggesting that the business - losses and all - is executing in line with estimates.

That's not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. There are some variant perceptions on DraftKings, with the most bullish analyst valuing it at US$105 and the most bearish at US$42.50 per share. This fairly broad spread of estimates suggests that company related risk is still relatively high.

Of course, another way to look at these forecasts is to place them into context against the industry itself. We would highlight that DraftKings' revenue growth is expected to slow, with the forecast 56% annualised growth rate until the end of 2021 being well below the historical 103% growth over the last year. By way of comparison, the other companies in this industry with analyst coverage are forecast to grow their revenue at 21% annually. Even after the forecast slowdown in growth, it seems obvious that DraftKings is also expected to grow faster than the wider industry.

This is primarily because the company is in a high growth stage and still undergoing mass adoption of its target consumer base.

The Bottom Line

The most important thing to take away is that the analysts reconfirmed their loss per share estimates for next year. Happily, there were no major changes to revenue forecasts, with the business still expected to grow faster than the wider industry. The consensus price target held steady at US$68.89, with the latest estimates not enough to have an impact on their price targets.

Keeping that in mind, we still think that the longer term trajectory of the business is much more important for investors to consider. We have estimates - from multiple DraftKings analysts - going out to 2025, and you can see them free on our platform here.

As a company, investors should pay close attention to the fourth quarter earnings because as mentioned earlier it’s expected that the biggest jump in revenue will come from the overlapping seasonal effects of the NFL and NBA.

And lastly, we’d always advise considering the risks involved. Case in point, we've spotted 3 warning signs for DraftKings you should be aware of.

There is one additional categorical risk factor which is separate from the financials, and that is the possibility of old legislation that prohibits sports betting in the United States returning.

In May 2018, the Supreme Court (the “Court”) struck down on constitutional grounds the Professional and Amateur Sports Protection Act of 1992 (“PASPA”), a law that prohibited most states from authorizing and regulating sports betting. Since the Court’s decision, many states have legalized sports betting. This allows the business to generate revenues, but is subject to possible revisions in the future, and should be incorporated into the rate of return which investors demand for acquiring the stock.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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