Investing in stocks can be a risky endeavor. Buying shares does not guarantee the investor a return on this investment. For this matter, it does not guarantee the investor the return on his initial investment.
This risk is exacerbated when investing in companies that have not established a consistent series of positive and growing profits. The flip side of the coin is that higher risk sometimes means higher potential reward. It is with Pinterest (NYSE: PINS) And kings (NASDAQ: DKNG), which has not yet made stable profits, but its huge potential makes the investment worthwhile.
Pinterest is an image-based social media company that is free to join and use. Offering something of value for free usually results in a lot of recipients. That was true for Pinterest, which had 444 million monthly active users as of the fiscal third quarter ended September 30. That’s 2 million more than the same period last year, but more importantly, it’s down 24 million from two previous quarters.
The company attracted millions of new users during the early stages of the pandemic when people were spending more time at home. Now that economies are reopening, Pinterest is quickly getting rid of users. Herein lies one of the risks of investing in Pinterest; It’s not certain how long and how many users Pinterest will lose as economies reopen.
Since Pinterest is free to join and use, it makes money by showing ads to consumers browsing its site and app. Revenue grew from $473 million in 2017 to $1.7 billion in 2020. However, Pinterest generated operating losses of more than $1.5 billion during that period. There is no telling whether or when the company will generate consistent profits.
The risks are obvious for this social media company, but the huge opportunity makes the investment worthwhile. According to GroupM, global ad spend will grow by 22.5% to reach $763 billion in 2021. What’s more, digital advertising takes a larger share of total ad spend, estimated at 64.4% in 2021, from 52.1% in 2019 .
With revenue of $1.7 billion in 2020, Pinterest is still a small part of the global advertising industry. It can grow to take a larger share of the market, which leads to a shift in the profitability angle.
DraftKings is an online gaming company. People can go to DraftKings to play daily fantasy sports, bet on a sporting event, or play online casino games like Blackjack. This is, of course, if you are in one of the states that have approval to work in them. DraftKings operates a mobile sportsbook in only 15 states and has iGaming services in only five countries.
DraftKings is at the mercy of state legislatures to legalize and approve it to operate within its jurisdiction. Even if they grant a license to operate, the terms may not be favourable. For example, DraftKings was recently approved to operate in New York State. In fact, adding the populous state could be profitable for the King of DrageKings, but the state requires 51% of all gaming revenue in exchange for allowing DraftKings to license.
Adding to the dangers of DraftKings is the heavy spending each time it is launched into a new state. Management estimates that revenue will reach $1.26 billion in 2021, a multiple of the $192 million in revenue it generated in 2017. However, the bottom line losses are increasing. In the nine months to September 30, it actually lost $1.2 billion.
However, DraftKings offers investors a significant upside. Once a company completes expansion into new territories, spending on marketing and promotion can drop significantly. Moreover, it may be more profitable to run a mobile gaming company than traditional casinos. DraftKings does not need to build and maintain huge buildings, which can cost billions.
However, before the pandemic disrupted the industry, some large casino operators had consistently achieved double-digit operating profit margins with multi-billion dollars in revenue. Remember the phrase “the house always wins”. Digitally native DraftKings has the potential to deliver better profit margins and revenue.
In general, Pinterest and DraftKings stocks are risky investments, but the massive rewards make them worthwhile for long-term investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.