DraftKings (NASDAQ:DKNG) offers gambling enthusiasts a more convenient way to bet. For decades, people seeking entertainment through gambling were forced to travel potentially for hours to geographic destinations where the activity was permitted. More recently, several state governments have deemed it wise to legalize online gambling.
DraftKings benefits from this state-by-state expansion. However, it is spending aggressively to acquire customers in every new market, and the bottom line losses are worrying investors. The stock fell 41% in 2021 and continued to fall in 2022. Here are three reasons why DraftKings stock could be a buying opportunity for long-term investors in 2022.
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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 the three quarters of reported results so far in fiscal 2021, management expects full-year revenue growth of 96%.
Meanwhile, DraftKings is expanding into more and more states. During its third quarter ended September 30, the company added Wyoming, Arizona and Connecticut to its list of states in which it offers mobile sports betting. This brings the total number of states where it provides the service to 15.
More recently, DraftKings launched mobile sports betting in New York. The state is estimated to bring in $1 billion in gross gambling 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 drive revenue growth significantly in 2022.
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2. An asset-based business model
Another strength of DraftKings: a resource-constrained business model. Traditional brick-and-mortar casinos can require hundreds of millions, or even billions, of capital to construct the huge buildings that house the casinos and hotel rooms. Then there is the ongoing cost of maintenance as well as thousands of employees to serve customers. While several brick-and-mortar casinos have achieved double-digit operating profit margins over the past decade (before the pandemic), huge expenses are undoubtedly a challenge.
Freed from these high expenses, DraftKings’ mobile gaming service has the potential to generate significantly higher operating profit margins when it reaches maturity. And since you don’t have to fly or drive for hours to bet on DraftKings, the potential customer base and frequency of customer visits could also be significantly higher.
For now, the Boston-based company is spending aggressively on marketing to attract customers, which is generating a lot of red ink on the bottom line. Operating losses have fallen from $77 million in 2018 to $1.4 billion in the past four quarters.
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3. A relatively favorable price
Naturally, the market became more and more focused on these massive losses. The stock price crashed 50% 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 for shareholders. However, for more aggressive investors, the accelerating revenue growth in an expanding market, the superior gaming business model, and the advantageous price could make the risk worthwhile.
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Parkev Tatevosian owns DraftKings Inc. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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