News of DraftKings (NASDAQ:DKNG) getting into the non-fungible token (NFT) business may have given its shares a boost late last month. But that’s not the main thing to focus on with DKNG stock. The future of the company’s sportsbook operations is still the main driver.
For now, it appears set to remain one of the largest sports betting platforms. But the competition is heating up. Land-based rivals continue to ramp up their online offerings, which could affect DraftKings’ future growth.
The company’s profitability also may start to affect its valuation going forward. For now, it’s fine for DraftKings to operate at a loss. Its heavy spending on marketing and promotions remains necessary to maintain a large market share — especially as more U.S. states legalize mobile sports betting. But at some point, investors could grow impatient and become less willing to give shares such a high valuation.
To top it all off, growth stocks in general may be under threat of multiple contraction. Depending on how the interest rate situation plays out, DKNG stock may have enough on its side to hold steady. Just don’t expect investors to bid it up any higher in the near-term.
DKNG Stock and the Risk of Competition
On the surface, DraftKings stock’s price-to-sales (P/S) ratio of 24.08x may make sense. Considerable revenue growth around 92% is projected for 2021. But going forward, future growth could be threatened by rising competition.
Flutter Entertainment’s (OTCMKTS:PDYPY) FanDuel unit, which also got its start as a daily fantasy sports operator, currently holds the most market share at 50%.
As a Motley Fool commentator recently broke it down, DraftKings may be able to prevent BetMGM, a joint venture between MGM Resorts (NYSE:MGM) and Entain (OTCMKTS:GMVHY), from supplanting it as the second-largest operator.
But who’s to say offerings from land-based casino giants won’t start to give DraftKings a run for its money? So far, Penn National’s (NASDAQ:PENN) Barstool Sportsbook platform has yet to become much of a threat.
However, Caesars Entertainment (NASDAQ:CZR), plans to invest heavily in its own sportsbook platform. The company could see the level of rapid growth BetMGM has experienced in recent months.
Profitability and Valuation Concerns
For now, DraftKings may be able to explain away concerns about the road to profitability. The U.S. sportsbook industry is still in the early stages of its growth. Profitability has taken a back seat for now as DraftKings focuses on scaling up. With its more mature operations already profitable, these concerns may be overblown.
Yet investors could start to get impatient. With losses expected in 2022 and 2023, the company may not get out of the red until the mid-2020s. Also, given the low-margin nature of sportsbooks, eventual profits could end up lower than projected. Put these factors together, and it may get harder for DKNG stock to sustain its current valuation, much less expand it from here.
Besides these concerns, something else could weigh on DKNG stock in the near-term. Its valuation could contract from rising interest rates. The risk of rising rates has already started to have an impact. That was seen in the stock’s pullback following inflation and interest rate scares in May.
If another one follows — or worse yet, if the Federal Reserve gives up on its “transitory inflation” thesis and shifts from dovish to hawkish monetary policy — we could see a more serious correction. If this scenario plays out, don’t expect DraftKings to come out unscathed.
Expect Pros and Cons to Cancel Each Other Out
Even with my concerns about competition, I’ll admit DraftKings remains in a strong position. Longstanding advantages may help it keep its current market share position. The expansion of mobile sports betting across the U.S. still points to above-average growth in the years ahead.
DraftKings’ latest earnings generally bode well for the company — it posted a better-than-expected loss last quarter and increased its full-year projections. But overall, as it’s still in growth mode with profitability and valuation concerns, don’t expect DKNG stock to make a big move anytime soon.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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