Standing out among the Street's worst performers today is DraftKings, a leisure company whose shares slumped -4.9% to a price of $28.76, 20.48% below its average analyst target price of $36.17.
The average analyst rating for the stock is buy. DKNG underperformed the S&P 500 index by -4.0% during today's afternoon session, but outpaced it by 101.0% over the last year with a return of 119.0%.
DraftKings Inc. operates a digital sports entertainment and gaming company. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
DraftKings does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-0.55 and $-2.69. We can see that DKNG has a forward P/E ratio of -52.3 and a trailing P/E ratio of -10.7. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into DraftKings market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing DraftKings's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.48. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, DraftKings's operating margins have averaged -100.7% and displayed a mean growth rate of -38.9%. These numbers show that the company may not be on the best track.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for DraftKings was $-403583000 as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In DKNG's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-205287666.7 and they've been growing at an average rate of -0.0%.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Draftkings's P/B ratio is 13.08 -- in other words, the market value of the company exceeds its book value by a factor of more than 13, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
DraftKings is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history with a flat trend. The stock has poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into DKNG's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
