Stock Analysis

DraftKings (NASDAQ:DKNG) Growth is Outpacing the Cash Burn

  •  Updated
NasdaqGS:DKNG
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DraftKings ( NASDAQ:DKNG ) stock is back on the starting line. After rallying over 50% earlier in the year, the stock underperformed investors' expectations and remains around an important level of US$55.

Even though the digital sports and entertainment industry is growing fast, DraftKings remains unprofitable, and today, we will examine its cash burn.

In this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Q2 Earnings Results

  • Non-GAAP EPS: -US$0.26
  • GAAP EPS: -US$0.76 (miss by US$0.18)
  • Revenue: US$298m (beat by US$50.78)
  • FY2021 guidance: Raised to US$1.21b-US$1.29b (consensus US$1.18b)

The company just announced it acquired Golden Nugget Online Gaming ( Nasdaq:GNOG ) in an all-stock transaction worth US$1.56b. This comes to a premium of over 50%.

DraftKings’ CEO Jason Robins noted that this acquisition would help them reach the broader consumer base and drive additional cross-sell opportunities. The transaction is expected to close in Q1 2022.

This news prompted speculation about other potential acquisition targets, namely fuboTV and Rush Street Interactive.

Meanwhile, the company rolled out the new NFT ecosystem , with exclusive content by superstar athletes such as Tom Brady, Tiger Woods, Naomi Osaka, and others. This is the attempt to capture a piece of the surging NFT market that already saw billions in sales volume for the first half of 2021.

View our latest analysis for DraftKings

Can DraftKings Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. We'll set aside the debt for now and focus on the US$2.6b in cash it held in June 2021.

Importantly, its cash burn was US$425m over the trailing twelve months. Therefore, from June 2021, it had 6.2 years of cash runway.

Notably, however, analysts think that DraftKings will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway today would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGS:DKNG Debt to Equity History August 16th, 2021

How Well Is DraftKings Growing?

DraftKings ramped up its cash burn by a whopping 84% in the last year, which shows it is boosting investment in the business. It seems likely that the operating revenue growth of 198% during that time may well have given management confidence to ramp investment.

Considering the factors above, the company doesn't fare badly when assessing how it is changing over time. However, the crucial factor is whether the company will grow its business in the future. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company .

Can DraftKings Raise More Cash if Needed?

We are certainly impressed with the progress DraftKings has made over the last year, but it is also worth considering how costly it would be to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalization, we understand how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

DraftKings has a market capitalization of US$22b and burnt through US$425m last year, which is 2.0% of the company's market value. That means it could quickly issue a few shares to fund more growth and might well be in a position to borrow cheaply.

Should We Worry About DraftKings' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way DraftKings is burning through its cash. Its revenue growth suggests that the company is on a good path.

While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide some comfort when it comes to the cash burn. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. However, one has to remain vigilant with increasing M&A activity and potentially overpaying for acquired companies.

Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well-capitalized to spend as needs be. An in-depth examination of risks revealed 2 warning signs for DraftKings that readers should think about before committing capital to this stock.

Of course, DraftKings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity or this list of stocks that insiders are buying .

Valuation is complex, but we're helping make it simple.

Find out whether DraftKings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.

About NasdaqGS:DKNG

DraftKings

DraftKings Inc. operates a digital sports entertainment and gaming company.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth2
Past Performance0
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and slightly overvalued.