DKNG share: rapid growth and rich valuation could keep it stable

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News from DraftKings (NASDAQ:DKNG) Going into the non-fungible token (NFT) business may have given its stocks a boost late last month. But that’s not the main thing to focus on with DKNG stock. The future of the company’s sports betting operations remains the primary driver.

For now, it looks set to remain one of the biggest sports betting platforms. But the competition is intensifying. Land-based competitors continue to develop their online offerings, which could affect the future growth of DraftKings.

The profitability of the business may also start to affect its valuation in the future. For now, it is normal for DraftKings to operate at a loss. Its heavy spending on marketing and promotions remains necessary to retain a significant market share, especially since more US states legalize mobile sports betting. But at some point, investors might get impatient and become less willing to give stocks such a high valuation.

To top it off, growth stocks in general can be threatened with multiple contractions. Depending on how the interest rate situation develops, DKNG stock may have enough on its side to hold up. Don’t expect investors to increase their supply in the short term.

DKNG stock and competition risk

On the surface, the DraftKings share price / sell (P / S) ratio of 24.08x may make sense. Considerable increased income around 92% is forecast for 2021. But in the future, future growth could be threatened by increasing competition.

Flutter Entertainment’s (OTCMKTS:PDYPY) FanDuel unit, which also made its debut as a daily fantasy sports operator, currently holds the largest market share at 50%.

Like a Motley fool commentator recently broken, DraftKings may be able to prevent BetMGM, a joint venture between MGM Resorts (NYSE:MGM) and Entain (OTCMKTS:GMVHY), to supplant it as the second operator.

But who can say that the offers of the land-based casino giants won’t start to give DraftKings a hard time? Until now, Penn National’s (NASDAQ:PENN) Sportsbook bar stool platform has not yet become a big threat.

However, Caesars Entertainment (NASDAQ:CZR), plans to invest heavily in its own sports betting platform. The company could see the level of rapid growth that BetMGM has seen in recent months.

Profitability and valuation concerns

At this time, DraftKings may be able to explain concerns about the path to profitability. The US sports betting industry is in the early stages of growth. Profitability has been left out for now as DraftKings focuses on scaling. With its more mature operations already profitable, these concerns may be overstated.

Still, investors may start to get impatient. With losses expected in 2022 and 2023, the company might not come out of red until the mid-2020s. Also, given the low margin nature sports betting, the potential profits could be lower than expected. Put these factors together, and it may become more difficult for DKNG stock to maintain its current valuation, let alone expand from here.

Besides these concerns, something else could weigh on DKNG stock in the near term. Its valuation could contract due to rising interest rates. The risk of a rate hike has already started to be felt. This was seen in the stock’s pullback following concerns about inflation and interest rates in May.

If another follows – or worse yet, if the Federal Reserve gives up its “transitory inflation” thesis and the shift from accommodative monetary policy to hawkish monetary policy – we may see a more serious correction. If this scenario plays out, don’t expect DraftKings to come out unscathed.

Expect the pros and cons to cancel out

Even with my concerns about the competition, I admit that DraftKings remains in a strong position. Long-standing advantages can help it maintain its current market share. The expansion of mobile sports betting in the United States continues to indicate above-average growth in the coming years.

DraftKings’ latest earnings generally bode well for the company – it posted a better than expected loss last quarter and increased its projections for the entire year. But overall, as it’s still in growth mode with issues of profitability and valuation, don’t expect DKNG stock to take a big step anytime soon.

At the date of publication, Thomas Niel did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Thomas Niel, contributor for InvestorPlace.com, has been writing unique stock analysis for web publications since 2016.

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