DraftKings Stock Could Be Vulnerable to Rising Rates, Says Goldman Sachs

Posted on: November 20, 2021, 05:52h. 

Last updated on: November 20, 2021, 06:41h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Downtrodden DraftKings (NASDAQ:DKNG) stock could be pinched by rising interest rates next year, according to Goldman Sachs.

DraftKings stock
The Federal Reserve is likely to raise interest rates next year. That could be bad news for DraftKings stock. (Image: Fox Business)

This year, the Federal Reserve surprisingly accelerated its time line for increasing borrowing costs. Fed funds futures are now pricing in with almost 100 percent certainty that the US central bank will raise rates at least once in 2022. Entering 2021, the consensus belief was that the Fed would not boost rates until 2023 or 2024.

Goldman Sachs forecasts that high-quality, profitable companies with robust margins can withstand Fed tightening. DraftKings, however, isn’t profitable. Recently, some analysts extended time frames for when the online sportsbook operator will cease losing money. At least one research firm pushed that time line out to 2024, while another said it could be 2025 when DraftKings turns profitable on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA).

Growth stocks with high profit margins outperformed unprofitable growth stocks when real rates jumped in 1Q 2021, and profitable stocks should remain resilient if rates rise in 2022,” said Goldman Sachs Chief US Equity Strategist David Kostin in a recent note to clients.

That commentary is encouraging for stocks that meet those qualifications, but potentially ominous for DraftKings – a name that’s already struggling. The shares are off 26.12 percent over the past month, and would need to more than double to reclaim the 52-week high.

DraftKings Stock Not Yet Tested by Rising Rates

DraftKings and every other iGaming and sports wagering equity, for that matter, haven’t earnestly been tested by a Fed tightening regime.

Since the 2018 Supreme Court ruling on the Professional and Amateur Sports Protection Act (PASPA), rates have steadily decline. That’s due in large part to a massive cut to historic lows by the Fed last year at the height of the coronavirus pandemic. The average Fed funds rate yield was 2.16 percent in 2019 before falling to 0.36 percent the following year and 0.08 percent in 2021, according to Macrotrends data.

Specific to DraftKings, the operator announced plans to merge with a special purpose acquisition corporation (SPAC) in December 2019. It became a standalone publicly traded entity in April 2020, meaning it hasn’t been around for a Fed rate hike.

That’s true of the bulk of the universe of publicly traded iGaming and sports wagering companies, most of which went public since early 2020. Others, such as FanDuel and BetMGM, are units of larger gaming enterprises.

Conundrum Facing DraftKings Stocks

Because of a lengthy period of low interest rates, high-growth stocks of profitable companies trade at multiples comparable to their unprofitable peers. That means investors are apt to lean toward the former group over the latter. That’s a negative for companies like DraftKings.

“Stocks with valuations entirely dependent on future growth are vulnerable to a dramatic drop in price if rates rise sharply or revenue growth expectations are reduced,” adds Goldman’s Kostin. “This latter risk was exemplified by the sharp underperformance of some notable high growth, low earnings companies following disappointing 3Q 2021 results and lowered forward revenue guidance.”

After sliding nearly 11 percent last week, DraftKings stock resides at 15-month lows.