One of Wall Street's biggest winners of the day is DraftKings, a leisure company whose shares have climbed 4.3% to a price of $39.48 -- 23.86% below its average analyst target price of $51.85.
The average analyst rating for the stock is buy. DKNG may have outstripped the S&P 500 index by 4.0% so far today, but it has lagged behind the index by 2.6% over the last year, returning 21.0%.
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 figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
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 -34.0. Based on the company's positive earnings guidance of $0.81, the stock has a forward P/E ratio of 48.7.
As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.06, and the S&P 500 has an average of 27.65. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
DKNG’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for DraftKings, we obtain a PEG ratio of 2.23, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
DraftKings's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -1,751 | 20,902 | -22,653 | 96.56 |
| 2022 | -625,519 | 32,402 | -657,921 | -51.1 |
| 2021 | -419,508 | 15,925 | -435,433 | -111.47 |
| 2020 | -194,157 | 11,752 | -205,909 |
- Average free cash flow: $-330479000.0
- Average free cash flown growth rate: 58.7 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for DKNG, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by 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 indicates that the market value of the company exceeds its book value by a factor of 22, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.18 as of the second quarter of 2024.
DraftKings is by most measures overvalued because it has a negative P/E ratio., a higher than Average P/B Ratio, and negative cash flows with an upwards trend. The stock has mixed growth prospects because it has a a negative PEG ratio and weak operating margins with a positive growth rate. We hope you enjoyed this overview of DKNG's fundamentals.
