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Expect DKNG Stock to continue its losing streak

When it comes to gambling, they say, “the house always wins.” But that was not the case with DraftKings (NASDAQ:DKNG) and DKNG shares. The i-gaming and online sports betting operator has captured a significant share of the growing US online gambling market.

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JThe problem is that he spends about $2.83 in expenses for every dollar of income he generates. To attract and retain users, it has to go broke with high marketing and promotion costs.

If you talk to those bullish on the stock, they’ll tell you that its high operating losses are “transient”. Over time, as it finishes growing, it can ease off with the marketing spend. From there, what it currently spends on customer acquisition costs will fall directly into the bottom line.

Yet given the strong competition, including from land-based casino operators with greater cross-promotion capabilities, it is uncertain whether its operating costs will decrease over time. Add to that the fact that the hype for sports betting games is long gone, and you know it’s a bad bet, plain and simple.

The latest with DKNG stock

On February 18, DraftKings released its fourth quarter and full year 2021 results. In the report, management boasted that its revenue for the period ($473 million) increased 47% year over year. It also came in the tips above.

For the full year, revenue was approximately $1.3 billion. It was more than 100% above what he had brought in for 2020. But if the turnover was good, his result was quite different. Operating losses increased with sales. Year-over-year, operating losses increased 85%, from $843 million to $1.56 billion.

His forecast for 2022 was also bad news for investors in DKNG shares. The analyst community expected the company to experience adjusted EBITDA losses of $699 million this year. According to management updates, this will be between $825 and $925 million.

The market, unsurprisingly, reacted very negatively to the results and forecasts. Shares plunged more than 21% right after the results.

Since then, it has picked up a bit. At around $20 per share, it was almost back to what it was trading for pre-earnings. This may in part be due to investors being prepared for the bullish case that an analyst presented. However, it is far from being a lock that this will happen.

Reducing costs can be difficult

In response to the earnings release and updated guidance, a sell-side firm downgraded DKNG action. Other analysts have left their grades unchangedbut have reduced price targets.

One analyst, however, remains very bullish on the stock: Thomas Allen of Morgan Stanley. He thinks investors are myopic when it comes to this stock. They are too focused on his current high losses.

According to Allen, the long-term potential should be the priority. To make his point, Allen cites what happened in the markets that legalized online gambling years ago. As the industry matured, leading companies in the industry were able to lower their customer acquisition costs, becoming highly profitable (think 25%-30% margins).

Assuming that will happen here, Allen deduces that DraftKings will one day become a high-margin business. But in my opinion, that sounds like a big guess to make right now.

Making a comparison between the US online gambling market and a mature market like the UK can be an apples to oranges situation. Why? The UK consists mainly of online-only operators. At the same time, the American market has several “hybrid” operators who are rapidly gaining market share.

When I say hybrid operators, I’m talking about gaming giants that own both online gaming and sports betting platforms as well as brick-and-mortar casinos. These companies may have the advantage.

Largely, they can stand out because they are able to cross-promote between their real and digital properties. This advantage may limit DraftKings ability to control its marketing and promotional expenses.

The basics of DKNG shares

Obtain an “F” rating in my portfolio binder, this big favorite has become a big outsider. But while it sometimes pays to go against the crowd, in this situation there’s no reason to try to erase the audience.

Based on its latest forecast, DraftKings will continue to suffer heavy losses. Competition from better-positioned “hybrid” operators could limit its ability to reduce its marketing expenditure over time. With its revenue growth also expected to slow, the window is closing on its ability to become a company worthy of its current market capitalization of $9.1 billion.

DraftKings is now valued more on results than hope and hype. As these results fall short of past expectations, now is not the time to double down on a bet on DKNG shares. Instead, the best thing to do is move on.

As of the date of publication, neither Louis Navellier nor the member of the InvestorPlace research staff principally responsible for this article holds (directly or indirectly) any position in the securities mentioned in this article.

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