DraftKings (NASDAQ:DKNG) has been in freefall since its Sept. 9 peak at $63.67 per share. As of January 13, it had fallen to $24.24 per share. This means that DKNG stock is below the price of $27.47 where it closed in late 2021.
So, in effect, the stock is down $39.43 since its peak on Sept. 9, a drop of 61.9% in just four months. And that’s after the company released its third quarter (Q3) results on Nov. 5.
Additionally, since its all-time high in 2021, closing at $71.98 on March 19, DKNG stock is now down 66%. This means that it has lost 2/3 of its value over the past nine months.
Something is wrong here. As I’ve written before, I think it’s because the market doesn’t like the company’s continued losses and its potentially dilutive takeover deal.
Where are things with DraftKings
Although revenue rose 60% year-over-year (YOY) to $213 million in the third quarter, its losses also increased. DraftKings said its losses for the quarter were $545 million, more than double its revenue.
Even after adjusting for non-cash expenses and certain other costs, the company’s third-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was negative $313.6 million. It is also higher than income. Additionally, in the past nine months, its continuing EBITDA loss was $548 million.
Most of these losses stem from its huge marketing and technology spend. This is to gain market share in online gambling arenas and casinos.
For example, in the last quarter, DraftKings spent $303.7 million on marketing and $65.2 million on technology. Together, those $368.9 million in growth costs represent 173% of its revenue ($213 million).
Cash consumption and cash balances
And keep in mind that these costs are in addition to gambling, overhead, and other costs (the revenue cost was $170.7 million).
To put it bluntly, DraftKings is bleeding money. Over the past nine months, according to its cash flow statement, the company has spent $366 million. As I wrote last month, that equates to an annual cash burn rate of $488 million.
So it’s a good thing that DraftKings unrestricted cash stood at $2.394 billion at the end of the quarter. At this rate, it can burn half a billion in cash every year for another 5 years or so.
But once it takes Golden Nugget online game (NASDAQ:GNOG) and its losses, this consumption of cash will increase. For example, GNOG reported that its nine-month operating cash flow loss was $29.5 million as of September 30. This will bring total cash burn to over $500 million next year.
Where does this let DKNG Stock go ahead
Analysts want to start seeing positive cash flow prospects going forward. At a minimum, they’ll want to see if acquiring GNOG eventually has the prospect of helping make the company profitable.
The good news now is that DraftKings has already provided guidance for its 2021 revenue of $1.26 billion. Additionally, he gave 2022 revenue forecasts of $1.7 billion to $1.9 billion. This implies sales growth of 42.9% over the next year, using the midpoint.
At the current market valuation of $9.854 billion, this puts DKNG stock on a forward price-sales metric of around 5.5x at the midpoint.
To say the least, it’s not a cheap valuation. However, this leaves the company room to grow in valuation, assuming revenues continue to grow by 40% to 50% per year.
What to do with DKNG actions
At this point, most investors will want to see how its Q4 revenue and cash burn are performing. If it looks like cash burn is on the rise, given its huge marketing and technology costs, the market might not be patient with the stock price.
On the other hand, its revenue growth is so high that there is a good chance that cash flow will turn positive sooner than expected. Overall, most investors will wait to accumulate more stocks until there appears to be light in the cash flow tunnel.
As of the date of publication, Mark R. Hake did not hold any position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and lead the Guide to Total Return Value which you can consult here.