DKNG

3 Reasons to Buy DraftKings Stock, and 1 Reason to Sell

This year has helped breathe new life into DraftKings (NASDAQ: DKNG) stock. After a brutal bear market in 2022, the stock rebounded in 2023 as investors came to appreciate its market expansions and massive growth potential.

Nonetheless, a key challenge presents concerns about its growth, particularly in some larger jurisdictions within the U.S. The question for investors is whether the following three positive attributes can outweigh that significant obstacle for the leisure stock.

Reason to buy: A growing market for sports betting

The company participates in both sports betting and iGaming. It began as a fantasy sports platform, a factor leading to what it calls an "immersive sports entertainment experience" in 8 different countries. It began offering DraftKings Sportsbook in 2018, the first legal online platform for sports betting. It started in New Jersey, but has since expanded to several other U.S. states.

Admittedly, the potential for sports betting is enough to persuade investors to at least watch the stock. Grand View Research predicts a 10% compound annual growth rate for the industry through 2030. That takes the industry's size from $84 billion in 2022 to $182 billion by 2030.

Reason to buy: Improving financials

So far, DraftKings covers only a small portion of that potential. In the first nine months of 2023, revenue totaled $2.4 billion, an increase of 76% versus the same period in 2022.

Over that time, the company shrank operating expenses. Unfortunately, that was not enough to stem its net losses, and DraftKings lost $758 million in the first three quarters of 2023. Still, that is down from more than $1.1 billion in the same period last year, so the reduced operating expenses have helped.

Given such results, it should not surprise investors that it raised 2023 revenue guidance to $3.7 billion at the midpoint. Moreover, since midpoint guidance for 2024 is between $4.5 billion and $4.8 billion, revenue will grow by 26% next year at the midpoint if that forecast holds.

Reason to buy: An attractive valuation

Over that time, investors have recognized its growing potential, and the stock has risen by around 145% over the last 12 months. Despite that gain, DraftKings stock has not become as expensive as some might assume.

The company's price-to-sales (P/S) ratio stands at around 5. That is significantly higher than the 2.6 sales multiple from the beginning of 2023. Nonetheless, the P/S ratio was consistently above 25 at the height of the last bull market in 2020 and 2021, and spiked as high as 43 in October 2020. So investors can now buy DraftKings at a significant discount.

Reason to sell: U.S. regulatory challenges

However, regulatory hurdles in parts of the U.S. could partially explain that lower valuation. Today, each of the 50 states regulates sports betting within its jurisdiction, and each state has its own set of rules. So far, DraftKings is fully live in only 25 of the 50 states, and entering each state requires DraftKings to invest money in infrastructure and compliance to do business in a new state.

Moreover, the U.S.'s three largest states, California, Texas, and Florida, have not passed such legislation. Since the three states have approximately 91 million people combined, this constitutes around 28% of the U.S. population that cannot bet with the company.

The verdict on DraftKings stock

DraftKings stock presents investors with a tremendous opportunity in sports betting. The addressable market is enormous, and the company has reported massive revenue growth in recent quarters. Despite those increases, investors can buy the stock at a considerable discount.

Admittedly, the dependence on favorable regulations, especially in the three largest U.S. states, could present a significant roadblock. But for now, the potential for growth far outweighs the challenges.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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