Shares of DraftKings Underperform the Market. What Do the Numbers Tell Us?

Leisure company DraftKings is taking Wall Street by surprise today, falling to $36.16 and marking a -11.4% change compared to the S&P 500, which moved 0.0%. DKNG is -31.12% below its average analyst target price of $52.5, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, DraftKings shares have outstripped the S&P 500 by 49.1%, with a price change of 75.2%.

DraftKings Inc. operates as a digital sports entertainment and gaming company in the United States and internationally. 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 release its trailing 12 month P/E ratio since its earnings per share of $-1.16 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for DKNG of -31.2. Based on the company's positive earnings guidance of $0.85, the stock has a forward P/E ratio of 42.5. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.96, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand DKNG’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

DraftKings’s PEG is 3.2, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in DraftKings's free cash flow, which was $-22653000 as of its most recent 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 $-372002333.3 and they've been growing at an average rate of 79.6%.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Draftkings's P/B ratio is 20.71 -- in other words, the market value of the company exceeds its book value by a factor of more than 20, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 4.24 as of the first quarter of 2023.

Since it has a negative P/E ratio., a higher than Average P/B Ratio, and negative cash flows with an upwards trend, DraftKings is likely overvalued at today's prices. The company has poor growth indicators because of a negative PEG ratio and weak operating margins with a positive growth rate. We hope you enjoyed this overview of DKNG's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.