DraftKings (NASDAQ:DKNG) isn’t protected from being hit by the occasional technical knock down. But now it’s looking eerily like other recognizable and formidable champions, and future setbacks in DraftKings stock should be wagered on.
For online betting upstart DraftKings whose roots are attached to traditional sports betting, 2020 has proven challenging amid the novel coronavirus as professional leagues and athletics across the globe came to a screeching halt during the pandemic. Even now, fans have to make do with the Bundesliga kicking off team play and Nascar revving its engines before empty stands. Alternatively, the relative quiet fairways welcoming professional golfers is now only slightly noisier without the help of fans “shhhh’ing” other bystanders into submissive silence.
Yet with very limited sporting events now just underway, a counter-intuitive long-shot bet of owning DraftKings prior to and through the Covid-19 pandemic has already paid off big-time compared to more well-known wagers on Wall Street with track records of winning.
Since the bear market low in late March, the benchmark mid-cap Russell 2000 is up about 38% and challenging the midfield line of its corrective move. Similarly, the diversified and large cap S&P 500 has gained roughly 36% but enjoyed a slightly stronger offensive push above its 62% retracement level. Meanwhile, storied champions Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) have understandably outperformed those bellwethers with their business models seemingly built for the pandemic.
But DraftKings has crushed them all.
DraftKings stock has gained 200% at Monday’s high since bottoming in front of the broader market’s Covid-19 grand finale low on March 23. Shares have also managed to dazzle investors with new highs. What’s more, DraftKings has packed on a market cap that’s lifted the stock towards the big leagues of large capitalization companies like the aforementioned tech giants with a valuation in excess of $9 billion.
So, what gives? Today’s investor enthusiasm in DraftKings exists for good reason despite the disruption in traditional sports. The fact is DraftKings has a first-mover advantage in a growing U.S. online sports gambling market, which will undoubtedly get back up on its feet. Investors are undoubtedly looking ahead.
A recent analyst note from Susquehanna initiated coverage on shares with a “positive” rating and $33 price target citing the company’s lead, proven market expertise and minimum compounded annual revenue growth rate of 80% through 2022. If correct, sales will balloon from last year’s $110 million to just over $675 million in the next couple years.
There’s more to the DraftKings story though.
DraftKings is also a play on other markets to place bets which offer the opportunity for explosive growth. New arenas for wagering, such as esports or the outcome of popular reality TV shows such as Survivor or Top Chef are coming into their own and rightfully have the attention of today’s early bettors on Wall Street.
DKNG Stock Daily Price Chart
Source: Charts by TradingView
Currently, Susquehanna’s price target of $33 implies upside potential of nearly 12%. To be truthful and for a volatile growth stock like DraftKings, it’s not a lot of wiggle room. But in front of last week’s reported quarterly red ink, investors wise to the firm’s recommendation could be positioned closer to $26. Still, for a 12-month target following the company’s thunderous 200% rally and bountiful gains in excess of 35% for index investors, even that return of roughly 27% doesn’t seem altogether worthy of the potential risk.
The good news is DraftKings true upside potential over the next year and beyond versus the stock’s downside risk appears much more favorable.
Right now analyst coverage other than Susquehanna and Morgan Stanley appears to be virtually non-existent in DraftKings. Not only will that undoubtedly change, it lends itself to other sell-siders on Wall Street eventually taking bullish notice of the stock. It’s not a stretch to anticipate other flat-footed analysts will lift their pom-poms into cheering position in the months ahead with much greater vigor.
For the time being, and as evidenced by the price chart, I’d personally be more enthusiastic if DraftKings pulled back towards more supportive levels within its uptrend. The fact is even the most favored stocks routinely go through corrections after larger rallies. Those temporary setbacks also happen all the time, even in healthier environments like today. Further, declines of up to 30% are quite common in growth stories like DraftKings. As such, a move towards $22 – $25 would have me much more interested wagering on the future of DraftKings stock.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
