Before the novel coronavirus knocked out live entertainment, DraftKings (NASDAQ:DKNG) was salivating over the idea of online sports betting. Not to mention betting on DraftKings stock.
Bookmaking was made legal through a 2018 Supreme Court decision based on the idea that if it was legal in one state, it should be legal everywhere. Sports books were allowed at Las Vegas casinos but nowhere else. The industry is now moving to make sports betting legal state-by-state.
Despite the lack of sports, Boston-based DraftKings merged into a special purpose company for $3.3 billion and came public on April 24. The issue has proven popular, rising 25% and opening May 13 at about $27.50.
But is this something you should bet on?
DraftKings Stock and the Soros Put
Shares rose about 10% on May 12 after it was learned that Quantum Partners, controlled by George Soros, owned 2.7 million shares.
The move seemed outlandish given that there are 312.5 million shares. With nearly half of those shares held by insiders and almost 6 million held short as of April 30, the move makes more sense.
But is this more than a trade? During 2019 DraftKings, which started life offering fantasy games to avoid being accused of being a bookie joint, had revenue of $323 million. Its market cap on May 13 was over $8.2 billion.
But today’s DraftKings isn’t that DraftKings. In December, before coming public, DraftKings merged with SBTech, a Europe-based provider of online gaming technology. This means it can offer both sports bets and casino games, once that’s legal. In a presentation upon the merger, DraftKings estimated the ultimate size of the U.S. sports betting market at $14-$23 billion.
The Future Hope
DraftKings is due to report earnings for the March quarter on May 15. Revenue is expected to come in at $97.4 million, with a small loss of about $40 million or 13 cents per share. Compare that with the $93 million in revenue delivered for the December quarter and the stock looks overvalued again.
What traders are betting on, of course, is the future. Las Vegas casinos handled $4.9 billion in sports bets during 2018. In 2016 online sports books in the United Kingdom, where such things have been legal for years, handled $12.3 billion.
European sports books have become a primary funding source for teams. Online casinos are now featured on the shirts of most professional soccer teams. If DraftKings were to run a baseball fantasy game and can quickly gain market share, the haul could be enormous.
The key to that is having adequate capital and media partners. DraftKings has ESPN owner Walt Disney (NYSE:DIS) as well as the National Hockey League. The company had $500 million in unrestricted cash at the time of the April offering.
There’s a media gold rush toward sports gambling. British sports bookmaker William Hill has an affiliation with CBSViacom (NASDAQ:VIAC).
The biggest player so far is Fanduel. Also owned by a European sports book is Ireland-based Flutter Entertainment (OTCMKTS:PDYPY). Fanduel claims 44% of the market in areas where it operates.
The Bottom Line on DraftKings Stock
If I were a betting man, I’d bet on DraftKings.
Online sports betting is going to happen. Eventually, so will an online casino industry, which already exists in many countries. The SBTech deal gives DraftKings all the technology it needs. The Disney investment means it has the biggest media megaphone: ESPN.
The question is how long this might take to play out, and whether the $8 billion market cap is justified. I think it’s stretched, a product of a short squeeze. But once the squeeze has run its course, you can throw some money at it with better odds than the Patriots have of making the next Super Bowl.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
