DraftKings (NASDAQ:DKNG) offers gambling enthusiasts a more convenient way to wager. For decades, people who sought entertainment through gambling were forced to potentially travel for hours to geographic destinations where the activity was permitted. More recently, several state governments have thought it wise to legalize gaming online.
DraftKings is benefiting from this state-by-state expansion. However, it is spending aggressively to acquire customers in each new market, and the losses to the bottom line have investors concerned. The stock fell 41% in 2021 and has kept falling in 2022. Here are three reasons why DraftKings stock could be a buying opportunity for long-term investors in 2022.
1. Accelerating Revenue Growth
From 2017 to 2020, DraftKings’ revenue grew from $192 million to $615 million and at an accelerating rate — from 17.9% in 2018 to 42.9% in 2019 and 90% in 2020. With three quarters of results announced so far in fiscal 2021, management expects to deliver 96% revenue growth for the full year.
Meanwhile, DraftKings has been expanding into more and more states. In its third-quarter ended Sept. 30, the company added Wyoming, Arizona, and Connecticut to its list of states in which it offers mobile sports betting. That brings the total number of states where it provides the service to 15.
Most recently, DraftKings launched mobile sports betting in New York. The state is estimated to bring in $1 billion in gross gaming revenue annually. If DraftKings can earn anything close to the 33% market share it claims in the rest of its markets, New York could help significantly boost revenue growth in 2022.
2. An asset-lite business model
Another strength DraftKings has going for it: an asset-lite business model. Traditional brick-and-mortar casinos can require hundreds of millions — if not billions — in capital to build the massive buildings housing the casinos and hotel rooms. Then there’s the ongoing cost of maintenance along with thousands of staff to serve guests. While several brick-and-mortar casinos earned double-digit operating profit margins in the past decade (prior to the pandemic), the huge expenses are no doubt a challenge.
Unencumbered by these elevated expenses, DraftKings’ mobile-gaming service has the potential for a significantly higher operating profit margins when it reaches maturity. And since one doesn’t need to get on a plane or drive for hours to make a wager on DraftKings, the potential customer base and frequency of customer visits could be significantly higher as well.
For now, the Boston-based company is spending aggressively on marketing to attract customers, and this is generating massive red ink to the bottom line. Operating losses have ballooned from $77 million in 2018 to $1.4 billion in the most recent four quarters.
3. A relatively bargain price
Understandably, the market has been increasingly focused on these massive losses. The stock price has crashed 50% from a year ago and is trading at a price-to-sales ratio of 9.5, near the lowest in DraftKings’ young history as a publicly traded company.
The current lack of profitability is undoubtedly a risk to shareholders. However, for more aggressive investors, the accelerating revenue growth in an expanding market, the superior gaming business model, and the bargain price could make the risk worthwhile.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.