DraftKings (DKNG) stock climbed 2.5 % this morning. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put DraftKings's valuation in the context of its poor growth indicators and positive market sentiment, which are also strong drivers for share price.
DraftKings Inc. operates a digital sports entertainment and gaming company. The mid-cap Consumer Discretionary company is based in Boston, United States and has 4,200 full time employees.
DKNG Has a Higher P/E Ratio Than the Sector Average
Compared to the Consumer Discretionary sector's average of 22.33, DraftKings has a trailing twelve month price to earnings (P/E) ratio of -12.2 and an expected P/E ratio of -53.2. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-2.4 or forward earnings per share of $-0.55.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since DraftKings's P/E ratio is higher than its sector average of 22.33, we can deduce that the market is overvaluing the company's earnings.
DraftKings Has a Positive Rate of Expected Growth
P/E ratios are limited because they don't tell us how the market is valuing the company's expected earnings growth. One way to solve this problem is to divide the current price to earnings ratio by the company's expected growth rate, which results in the price to eanrings growth, or PEG, ratio. DraftKings has a negative PEG ratio of -0.46, and since the company's earnings per share are negative, we can deduce that the expected growth rate is positive. While a negative PEG ratio is never a good sign, investors may fin solace in the positive growth expectations.
DKNG Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since DraftKings's P/B ratio of 13.31 is higher than its sector average of 3.12, such a margin of safety does not exist for the stock.
DKNG's Weak Cash Flow Generation Is Troubling
The table below shows that DraftKings is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in DraftKings's case, free cash flow is growing at an average rate of -0.0% with a coefficient of variability of 89219357.5%. We can also see that cash flows from operations are evolving at a -0.0% rate, versus 0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-02-18 | -419,508 | -15,925 | -403,583 | -121.26 |
| 2021-02-26 | -194,157 | -11,752 | -182,405 | -510.56 |
| 2020-02-26 | -46,578 | -16,703 | -29,875 |
DraftKings Is Not a Profitable Business
If you are looking to make DKNG a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and DraftKings's management may be able to make the business profitable in the future.
DraftKings's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-02-18 | 1,296,025 | -794,162 | 39 | -11.36 |
| 2021-02-26 | 614,532 | -346,589 | 44 | -35.29 |
| 2020-02-26 | 323,410 | -103,889 | 68 |
DraftKings's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-02-18 | 1,296,025 | -2,063,480 | -120 | 12.41 |
| 2021-02-26 | 614,532 | -1,111,199 | -137 | -204.44 |
| 2020-02-26 | 323,410 | -366,066 | -45 |
DraftKings's cost of revenue is growing at a rate of -0.0% in contrast to -78.0% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is -0.2 and the average operating margins growth rate is -38.9, with coefficients of variability of 30.8% and 48.6% respectively.
DraftKings Benefits From Positive Market Signals
The market sentiment regarding DraftKings is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $44.0 to $22.5. DKNG is trading -19.09% away from its target price of $36.17. 5.4% of the company's shares are tied to short positions, and 56.2% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Vanguard Group Inc | 8% | 36,928,753 | $1,080,719,934 |
| 2023-06-30 | ARK Investment Management, LLC | 4% | 18,060,463 | $528,539,438 |
| 2023-06-30 | Blackrock Inc. | 4% | 17,779,455 | $520,315,739 |
| 2023-06-30 | Sumitomo Mitsui Trust Holdings, Inc. | 2% | 10,947,439 | $320,376,795 |
| 2023-06-30 | Nikko Asset Management Americas, Inc. | 2% | 10,947,439 | $320,376,795 |
| 2023-06-30 | Capital Research Global Investors | 2% | 8,816,575 | $258,017,061 |
| 2023-06-30 | Whale Rock Capital Management LLC | 2% | 8,117,682 | $237,563,958 |
| 2023-06-30 | Two Sigma Investments, LP | 2% | 7,398,711 | $216,523,272 |
| 2023-06-30 | Shaw D.E. & Co., Inc. | 1% | 6,861,986 | $200,816,016 |
| 2023-06-30 | Invesco Ltd. | 1% | 6,707,531 | $196,295,890 |
