DraftKings stock price has rallied for seven consecutive days, reaching its highest level since June 20 after publishing better earnings than expected. DKNG shares jumped to a high of $43, up by over 50% from its lowest level in August.
DraftKings business is doing well
DraftKings, the second biggest player in the sports betting industry in the US, is doing well, as the boom cycle continues. Its annual revenue has soared from $323 million in 2019 to over $4.6 billion in the trailing twelve months. That was a spectacular 1,324% increase in just five years.
DraftKings believes that it has more room to grow since the US market remains at its infancy despite its recent growth. It has seen the number of users on its platform continue growing, with the unique ones rising from 800k in Q1’17 to over 9.3 million in the last quarter.
It is also adding more solutions into its ecosystem. For example, following Polymarket’s success in the last election, the company hopes to offer these predictions as well. It hopes to leverage its large user base to beat other popular competitors like PredictIt and Kalshi.
DraftKings recent financial results showed that its business was doing well as its revenue jumped by almost 40%. It generated $1.09 billion in quarterly revenue. However, higher costs and taxes pushed its net loss up to $293 million during the quarter.
DraftKings’ nine-month revenue rose to $3.37 billion, while its net loss slowed to $447 million. It hopes that its margin expansion will help to make it a profitable company in the next financial year. DKNG’s management sees the company generating an EBITDA of between $900 million and $1 billion in the next financial year.
Analysts expect that DraftKings revenue will rise by 30% in the current quarter to $1.6 billion. If this is correct, then its annual revenue will be $5 billion, a 36.4% growth from last year. It will then hit $6.36 billion in the next financial year.
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Is DraftKings stock overvalued?
A key concern among investors is that DraftKings stock is overvalued since it has a market cap of over $21 billion and is still losing money.
To some extent, there is some truth in this. However, this valuation can be justified by the fact that DraftKings is growing its business and is committed to turn a profit in the next financial year.
If this growth trajectory continues, it means that the company will get to over $10 billion in the next few years. It will then start to focus its business on profitability. Sports betting companies typically have a net profit margin of between 5% and 7%.
$10 billion in annual revenue and a 5% margin means that it could generate between $500 million and $800 million in profits over time. This means that the company’s valuation is not all that stretched for now.
A key concern for DraftKings is that the industry is highly competitive, with the other big names like FanDuel, BetMGM, Barstool Sportsbook, and Caesars Sportsbook fighting to gain market share.
Read more: DraftKings stock outlook: MoffettNathanson sees a 30% upside
DraftKings stock price analysis
The daily chart shows that the DKNG share price has been in a strong bullish trend in the past few weeks. It has moved above the 23.6% Fibonacci Retracement level.
DKNG shares have remained above the 50-day and 100-day Exponential Moving Averages, meaning that bulls are in control for now.
Most importantly, DKNG stock has formed an inverse head and shoulders pattern, a highly popular sign in the market. Therefore, it will likely continue rising as bulls target the next key resistance level at $50, its highest level this year, which is about 15% above the current level.
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