DraftKings (NASDAQ:DKNG) is still blowing through large amounts of cash flow as seen in its latest quarterly results, released on Feb. 18. As a result, if this keeps up, DKNG stock could be in for a rough time over the next year.
This is after the stock has already cratered. It is well off its peak of $63.67 as of Sept. 9, trading at $21.83 on Feb. 24. This means it’s down over 64% for the past six months.
That is well more than a correction. It’s a disaster. In fact, even year-to-date (YTD) DKNG stock is down over 25% from $27.47 where it ended on Dec. 31.
Where Things Stand With DraftKings
The latest results show that the company’s revenue was much higher at $473 million for the quarter, up 47% year-over-year (YoY). Moreover, the company was quick to point out that this even exceeded guidance previously provided by 8%.
In addition, 2021 revenue grew 101% YoY after adjusting for acquisitions. This shows that the company is still on a roll in terms of customer acquisition.
However, DraftKings is still losing money and hemorrhaging cash. For example, its net loss for fourth quarter was $326 million, which was worse than last year at a negative $242.7 million. However, slightly better news than expected, this was better than the $545 million loss in Q3.
Even after adjusting for certain non-cash expenses, the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was still deeply negative. For example, its adj. EBITDA for Q4 was -$128 million vs. -$87.9 million last year.
However, this performance in Q4 was significantly better than the negative $313.8 million adj. EBITDA in Q3. In other words, the company is not burning through as much cash.
Cash Flow Is Worsening
Or is it? I looked at the actual cash flow statement. It shows a much different picture, so I am not so sure things are improving.
For example, the 10-Q filing on page F-8 shows that DraftKings had an operating cash flow of negative $419.5 million for the year. But if you look at the same statement on page 6 of the Q3 quarterly filing shows that for the first 9 months the cash outflow was just $29.5 million.
In other words, the cash outflow worsened from $29.5 million to $419.5 million in just one quarter — Q4. That implies that the Q4 cash outflow (before capex spending) was negative $390 million (i.e., 419.5million – $29.5million).
Moreover, the free cash flow (FCF) situation is just as bad. FCF includes operating cash flow as well as capital expenditure spending. The nine month FCF was negative $30.1 million and the full-year FCF was negative $435.4 million. Therefore, the Q4 FCF was negative $405.3 million.
This cannot continue for more than one year. That would cause an outflow of $1.62 billion. But the company has just $2.15 billion in cash on its balance sheet (before customer cash).
That will drag down the stock price as this cash flow continues. The reason is that investors will worry that the company will need to do another equity raise that will be dilutive. Even a debt raise lowers the value of the company since it reduces cash flow and equity over time.
What To Do
Even though analysts are still positive on DKNG stock, the average price targets have been dropping like a rock.
For example, Seeking Alpha shows that the average of 29 analysts is $37.68. However, this has been downgraded dramatically from $59.46 as of Jan. 7.
In other words, analysts are basically reassessing the situation as the stock has cratered. They also see the huge cash outflow going on. If this continues in Q1, I would suspect that will wake up and significantly lower their price targets.
So far, despite the huge gains in revenue, the cost has not been worth it, in terms of the drop in DKNG stock. In this case, let the buyer beware.
On the date of publication, Mark Hake directly held a long position in VeChain crypto but not in any other of the securities mentioned in this article, either directly or indirectly. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.