DraftKings (DKNG) stock looks worth watching as new normal sets in

The sports and entertainment markets are among the worst-hit by the COVID crisis, with the majority of events being canceled or postponed due to movement restrictions. With not much sporting activity happening, online sports betting operator DraftKings Inc. (NASDAQ: DKNG) ended fiscal 2020 on a mixed note, casting uncertainty over its profitability strategy.

The Boston, Massachusetts-based fantasy games portal become a public company about a year ago with a market cap of $16 billion, after the business witnessed solid growth following regulatory amendments that eased restrictions on sports betting.

Unfazed by Crisis

DraftKings has remained on the growth path despite the pandemic, forging new tie-ups with leading brands and often becoming their ‘official betting partner.’ The rapidly expanding userbase bodes well for it, considering the growing adoption of digital platforms for leisure and entertainment during the shutdown.

So, the company’s stock should be able to shrug off the recent weakness and return to the record highs seen a couple of weeks ago. The dip in valuation offers a buying opportunity that can yield decent returns. But, those with short-term interests might be disappointed. The average rating on the stock is moderate buy.

Call for Caution

On the flip side, the slowdown the sporting world is currently facing and lack of clarity on the resumption of suspended events could be a drag on the company’s financial performance, going forward. Adding to the uncertainty, consumer spending has remained under pressure due to dismal labor market conditions and faltering economic recovery.

While staying focused on daily fantasy sports, DraftKings’ core business, the company recently expanded its portfolio by adding sports betting and online casino gambling – referred to as iGaming – thereby accelerating the growth momentum. But the future prospects of that segment would depend on more US states legalizing online gambling, the market for which is expanding steadily.

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Read Management/analysts’ comments on DraftKings’ Q4 report

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Meanwhile, additional revenue streams helped the company ease the impact of mounting losses, caused mainly by investments in growth initiatives. Experts are optimistic about the future of sports betting and iGaming in the U.S, predicting a ten-fold growth in the next five years.

Revenue Doubles

In the fourth quarter, the company incurred a net loss of $266.4 million, which is sharply wider than the $33-million loss recorded a year earlier. The bottom-line was negatively impacted by elevated operating costs. Meanwhile, revenues nearly doubled to $322.2 million, which prompted the management to upgrade its full-year 2021 guidance.

At the end of fiscal 2020, the company had about 1.5 million monthly unique players, which is double that of the number recorded a year earlier. But heavy capital spending is likely to delay the turnaround, probably beyond 2021.

I continue to be pleased with the progress we are making with our organizational integration and the migration to our proprietary in-house back-end and trading technology. Our technology migration is on track to be complete by the end of the third quarter of 2021. Owning our own technology is important. It will help with innovation, speed to market, site stability, and availability of markets. We will also realize gross margin synergies associated with the migration starting in the fourth quarter of this year.

Jason Robins, chief executive officer of Draftkings

Despite experiencing continued volatility since the IPO, DraftKings’ shares maintained an uptrend all along and reached an all-time high earlier this month. But it pulled back since then amid the tech sell-off that disrupted the recent market rally.