DraftKings Sells Off After Earnings: Here’s How to Trade It

The Super Bowl was what everyone had hoped for. A close game involving at least one major market based team, and a halftime show that held the attention of more peripheral fans. All told, roughly 112M viewers tuned in, up 14% from the year prior, when the sport’s most famous player, Tom Brady had participated. About 99.2M viewers watched on NBC proper, another 11.2M streaming the game through Peacock, and another 2M or so, on Telemundo. It had been a good year for the National Football League. Ratings were the highest since 2015.

It follows that with interest so high, and another 10 states legalizing online gambling over the past year, that this game might be epic for online sports books such as DraftKings (DKNG) , FanDuel, BetMGM (MGM) , and a bevy of others. According to GeoComply, an organization that monitors the industry, more than 80M transactions were logged over Super Bowl weekend, which more than doubled from last year. A rough 5.6M unique accounts accessed legal online sportsbooks. That was up 95% from a year ago. Is there a bright future? For the industry, with a never experienced before ease of access for users, one would think.

DraftKings Reports

On Friday morning, DraftKings released the firm’s fourth quarter financial results. The firm posted a GAAP loss of $0.80 per share, which beat Wall Street by a penny, and compares to a loss of $0.79 for the year ago period. After adjusting primarily for stock based compensation, the non-GAAP EPS print improves to a loss of $0.35. On the bright side, DraftKings generated revenue of $473M, which beat Wall Street, and was good for year over year growth of 46.9%. That, however, was a significant deceleration of growth for a second consecutive quarter and the slowest pace of such growth for any quarter since Q2 2020.

As revenue increased 46.9% from the year ago period, cost of revenue increased 59% to $253.2M, while sales and marketing expenses (not included in cost of revenue) increased 45% to $278.4M. In addition, general and administrative costs increased 39% to $240.8M. Tack on another $69.6M in product and technology costs and the firm was left with a loss of $386.8M from operations. After adding in a number of positive impacts to the bottom line, net profit/loss ends up at $-326.3M, down from $-242.7M for Q4 2020. Adjusted net profit/loss printed at $-128M.

Performance Metrics

– Monthly Unique Players (MUP) increased 32% to 1.971M, versus the 2.1M that Wall Street had in mind.

– Average Revenue per MUP (ARMUP) increased 19% to $77, benefitting from the cross-selling of customers into more products.

Guidance

With the addition of New York and other states to the growing number of locales where online gambling is now legal, the firm was able to increase revenue guidance. The firm now sees full year 2022 revenue generation at $1.85B to $2B, up from prior guidance of $1.7B to $1.9B. That would be good for year over year growth of 43% to 54%. Wall Street was at $1.9B for this number. The firm also expects adjusted EBITDA to land in between $-825M and $-925M. Wall Street was at sub $-700M on that item. This is the primary reason why DKNG investors are racing for the exits on Friday.

Wall Street

I don’t see a lot of opinion out there this morning in response to this release. On Thursday (yesterday) Morgan Stanley’s five star (at TipRanks) analyst reiterated his “buy” rating for DKNG with a $31 price target, but did warn that higher promos had probably impacted Q4 performance more than previously thought. Tip of the cap, however, to Ed Engel (two stars) of Roth Capital who maintained his “sell” rating earlier this week.

My Thoughts

Friday morning’s selloff places the shares right back at the central trend line of a six month long downward sloping Pitchfork model. The shares are currently in danger of testing their January lows as well. Scary thing is that DKNG is not even that close to being technically oversold.

Would I buy this dip? Maybe for a trade, with the understanding that I was gambling on gambling. Would I invest in DraftKings? Not with my money. Not with your money. Not with your money even if I hated your guts. No.

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