What a brutal six months it’s been for DraftKings. The stock has dropped 39.4% and now trades at $27.26, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in DraftKings, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is DraftKings Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than DKNG and a stock we'd rather own.
1. Weak Growth in Monthly Unique Players Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like DraftKings, our preferred volume metric is monthly unique players). While both are important, the latter is the most critical to analyze because prices have a ceiling.
DraftKings’s monthly unique players came in at 3.6 million in the latest quarter, and over the last two years, averaged 28.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Operating Losses Sound the Alarms
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 8.2% over the last two years. This is due to its large expense base and inefficient cost structure.
3. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict DraftKings’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 12% for the last 12 months will decrease to 12.6%.
Final Judgment
DraftKings isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 25.2× forward P/E (or $27.26 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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