DraftKings (DKNG)

Fantasy sports and betting company DraftKings (NASDAQ:DKNG) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 19.9% year on year to $1.41 billion. The company’s full-year revenue guidance of $6.3 billion at the midpoint came in 1.1% below analysts’ estimates. Its non-GAAP profit of $0.12 per share was in line with analysts’ consensus estimates.

Company Overview

Getting its start in daily fantasy sports, DraftKings (NASDAQ:DKNG) is a digital sports entertainment and gaming company.

Gaming solution companies operate in a dynamic and evolving market, and the digital transformation of the gaming industry presents significant opportunities for innovation and growth, whether it be immersive slot machine terminals or mobile sports betting. However, the gaming solution industry is not without its challenges. Regulatory compliance is a crucial consideration as companies must navigate a complex and often fragmented regulatory landscape across different jurisdictions. Changes in regulations can impact product offerings, operational practices, and market access, requiring companies to maintain flexibility and adaptability in their business strategies. Additionally, the competitive nature of the industry necessitates continuous investment in research and development to stay ahead of competitors and meet evolving consumer demands.

Competitors in the digital sports entertainment and gaming sector include Caesars Entertainment (NASDAQ:CZR), PENN Entertainment (NASDAQ:PENN),and Rush Street Interactive (NYSE: RSI).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, DraftKings’s 61.7% annualized revenue growth over the last five years was incredible. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. DraftKings’s annualized revenue growth of 38.9% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, DraftKings’s revenue grew by 19.9% year on year to $1.41 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 34.1% over the next 12 months, a deceleration versus the last two years. Still, this projection is noteworthy and indicates the market is forecasting success for its products and services.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

DraftKings’s operating margin has been trending up over the last 12 months, but it still averaged negative 11.6% over the last two years. This is due to its large expense base and inefficient cost structure. It might have a shot at long-term profitability if it can scale quickly and gain operating leverage.

In Q1, DraftKings generated a negative 3.3% operating margin.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

DraftKings’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

In Q1, DraftKings reported EPS at $0.12, up from $0.03 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects DraftKings’s full-year EPS of $0.31 to grow 436%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

DraftKings has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.9%, lousy for a consumer discretionary business.

DraftKings burned through $152.9 million of cash in Q1, equivalent to a negative 10.9% margin. The company’s cash burn increased from $73.42 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings.

DraftKings reported $1.12 billion of cash and $1.92 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $261.5 million of EBITDA over the last 12 months, we view DraftKings’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $25.49 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see DraftKings beat analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed and it lowered its full-year revenue and EBITDA guidance. Overall, this was a softer quarter, but the stock traded up 2.3% to $36.23 immediately after reporting.

Updated: May 15, 2025 at 10:35 PM EDT

Before deciding whether to buy DraftKings or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There’s plenty to admire about DraftKings. To kick things off, its revenue growth was exceptional over the last five years. And while its operating margins reveal poor profitability compared to other consumer discretionary companies, its projected EPS for the next year implies the company’s fundamentals will improve. On top of that, its number of monthly unique players has surged over the last two years.

DraftKings’s P/E ratio based on the next 12 months is 22.5x. Looking at the consumer discretionary landscape right now, DraftKings trades at a pretty interesting price. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $53.24 on the company (compared to the current share price of $36.70), implying they see 45.1% upside in buying DraftKings in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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