DraftKings Plunges as 2022 Guidance Highlights Profitability Concerns

Time Stamp: February 18, 2022 2:01 PM

Shares of DraftKings (NASDAQ:DKNG) are lower by almost 20 percent on volume that’s more than double the daily average in midday trading. That’s after the online sportsbook operator presented investors with 2022 guidance that further accentuates its long road to profitability.

DraftKings guidance
DraftKings highlighted at the Nasdaq market site. The stock is cratering today following a disappointing 2022 outlook. (Image: Twitter)

While the Boston-based gaming company said fourth-quarter revenue surged 47 percent to $473 million, analysts and investors focused more on the 2022 outlook, explaining the stock’s slide today. For this year, DraftKings is forecasting sales of $1.85 billion to $2 billion on an earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $825 million to $925 million.

Analysts expected 2022 revenue of $1.9 billion on an EBITDA loss of $699 million. The company’s updated guidance for this year reflects the addition of the Louisiana and New York markets, and Oregon’s transition to the DraftKings’ business-to-consumer platform. The outlook doesn’t factor in new state launches, including Maryland and Ontario, Canada, which are slated to happen later in 2022.

Promotional Spending Too High

Investors reaction to DraftKings’ 2022 forecasts is likely the byproduct of growing dissatisfaction with elevated levels of promotional expenditures.

Translation: Sports wagering companies are profligate spenders in the name of attracting customers, but the operators aren’t figuring out ways to turn a profit. In the fourth quarter, DraftKings’ average revenue per monthly unique payer climbed 19 percent to $77. Yet, the operator continued bleeding cash.

We remain negative on DKNG shares, where we believe the current promotional environment is overshooting underlying demand,” said Roth Capital analyst Edward Engel in a note to clients today.

He rates DraftKings a “sell” with a $23 price target — one of the lowest outlooks on Wall Street. The company believes it would have turned EBITDA positive in the fourth quarter of this year if not for the first-quarter launches in Louisiana and New York, confirming promotional spending is a drag on profitability.

DraftKings added it believes it can be EBITDA positive in the fourth quarter of 2023. However, analysts have their doubts, as some previously called for the company to not shed its money-losing ways until 2024, while some think it will take longer than that.

DraftKings Sneezes, Gaming Stocks Catch Colds

DraftKings 2022 EBITDA guidance is sending shockwaves throughout the sports wagering equity complex, as investors ponder the fate of other operators against the backdrop of heavy promotional spending.

Friday is proving to be a miserable day for gaming stocks of all stripes. But on the back of the DraftKings update, those tethered to the iGaming and sports betting industries are incurring significant punishment to end the week.

For example, Golden Nugget Online Gaming (NASDAQ:GNOG), which DraftKings is acquiring, is lower by almost nine percent. Penn National Gaming (NASDAQ:PENN), operator of Barstool Sportsbook, and Rush Street Interactive (NYSE:RSI) are off three percent and five percent, respectively.

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