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The Dip in DraftKings Stock Is a Perfect Buy Opportunity

DraftKings (NASDAQ:DKNG) stock has had a rough start to 2022, and things got a bit rougher for the stock recently after the company reported somewhat disappointing fourth-quarter earnings results. In response, DKNG stock was down to $17 f…

DraftKings (NASDAQ:DKNG) stock has had a rough start to 2022, and things got a bit rougher for the stock recently after the company reported somewhat disappointing fourth-quarter earnings results. In response, DKNG stock was down to $17 from $22 and it has since fallen 23% year-to-date. However, the current dip is solely due to the earnings call and the mounting losses are only temporary.

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The pandemic gave a push to several industries and one of them was online gaming. As states began to legalize online gaming, companies like DraftKings started to expand the market and offered unique gaming experiences to users. The company is present across several states now and is constantly innovating to ensure high user satisfaction.

So while DKNG stock has consistently dipped for the past six months, I still see a solid chance of a rebound in the near term. The stock looks more appealing now after having gone from $60 to the lows of $17 this week, a decline of more than 60%. With that in mind, let’s take a deeper look at why this is an ideal buy opportunity.

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Operating Expenses Are Going in the Right Direction

DraftKings recently reported fourth-quarter revenue at $473 million which beat analyst expectations. It suffered a loss of 35 cents per share and had a negative adjusted EBITDA of $128 million. The company is not profitable yet and the losses are piling up as the competition in the industry continues to grow. DraftKings expects to reach profitability in late 2023. The monthly unique players increased by 32% and the average revenue per monthly unique player increased by 19%.

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DraftKings also added that if it had not planned the expansion to any new states this year, it could have achieved positive adjusted EBITDA by the fourth quarter of the year, but it only began mobile sports betting in Louisiana and New York last month. This is a sign that the company is expanding its market share and the costs associated with it will be a byproduct of it.

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It is also interesting to note that the company chooses to continue to expand into new markets instead of trying to cut down the costs to generate profit.

The company is spending a lot of money on attracting customers, which is reflected in the sales and marketing expenses that are close to $1 billion. This expense is important when building a user base, but if DraftKings manages to attract users at the same pace, it will be able to benefit from the spending.

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Investors are losing patience with DKNG stock and are worried that the business might never become profitable. The competition in the industry is intensifying while DraftKing’s losses are growing. However, the money is not going down the drain, it is an expense that will pay off in the long term.

It has projected a revenue of $1.85 billion to $2 billion for 2022 and an EBITDA loss of $825 million to $925 million.

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Bottom Line on DKNG Stock

DraftKings is looking to expand its business but this also means it will have to spend more money. DraftKings is also fighting a tough battle for market share and the competition is only going to intensify in the coming years. The advertising spend of companies like DKNG is usually pretty big and these companies require several incentives to engage users on their platforms. We should expect DKNG to throw more money in the market to attract users and gain a share in the industry.

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There was a time when we valued DraftKings and invested in its massive potential. This is also when the stock was trading around the $70 mark in March 2021. Nothing has truly changed for the company. Instead, it has expanded into new states and it has attracted more users. The investment in advertising and sales is certainly going to pay in the long term. Give DKNG a couple of years and it will be reporting solid numbers.

Do not ignore DraftKings simply because it missed analyst estimates. DKNG stock is trading close to an all-time low and this is the time to place your bet.

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On the date of publication, Vandita Jadeja 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.

Vandita Jadeja is a CPA and a freelance financial copywriter who loves to read and write about stocks. She believes in buying and holding for long term gains. Her knowledge of words and numbers helps her write clear stock analysis.

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