How and why is it possible for DraftKings (NASDAQ:DKNG) to keep on pushing higher despite the high valuation? A quote from CNBC’s resident celebrity trader Jim Cramer might shed a ray of light on the market mystery of DraftKings stock.
“Investors are simply trying to make money, and that’s why they’re crowding into the stay-at-home economy stocks,” explains Cramer.
With that observation, Cramer recently recommended taking a position in what he calls “stay-at-home” stocks. And DraftKings stock would undoubtedly fall into this category as the company is heavily involved in the digital sports gaming and betting market.
Cramer might be making a valid argument, but would it really make sense to buy DraftKings stock after its massive share-price rally?
Betting on Anything and Everything
There’s no denying the success of the stay-at-home trade this year, at least if you’re using DraftKings stock as a gauge. Indeed, from the middle of March to early June, the DraftKings share price tripled and then some.
Apparently, with shelter-in-place mandates keeping people cooped up in their homes, folks have turned to digital modes of self-entertainment. And having gone public on the Nasdaq exchange in April, the introduction of DraftKings stock to the trading community couldn’t have happened at a better time.
Today, digital sports betting seems to be hotter than ever. It’s actually gotten to the point where a phenomenon known as “in-game betting” is gaining traction.
To put it simply, in-game betting means that people aren’t even betting on the final outcome of the game because they don’t want to wait that long. They’re wagering on the smaller events and minutiae within the games.
“People are betting on every point. It’s literally at that level,” says DraftKings CEO Jason Robins. He also observes that “In the U.K., in-game is about 75% of the revenues at sports books.”
It looks like sports fans are betting on just about every little detail of these games. That’s a deep level of addiction, and it might be worrisome, but it suggests continued profitability for DraftKings as a business.
Analysts Weigh In With Price-Target Revisions
It’s probably not a coincidence that Wall Street analysts tend to favor stocks that have increased in value. In the case of DraftKings stock, the prevailing sentiment is that the stay-at-home trade, and e-sports betting in particular, will remain lucrative.
Much of the enthusiasm is due to the prospect of live sporting events starting back up across the country. After all, sports betting is a whole lot easier to do when there are live events to bet on.
Wall Street is likely also wagering on the possibility of expansion for DraftKings’s operations. Currently the company is operational in less than 10 U.S. states and it provides online offerings in seven states. If more states ease their sports-betting restrictions, DraftKings has the potential to scale up quickly.
And on a fiscal level, the company isn’t operating in the red. In fact, as Matt McCall and the InvestorPlace research staff point out, DraftKings “has no debt and more than $450 million on its balance sheet.”
Perhaps due to these considerations, a bevy of bulls in the analyst fraternity have bestowed the blessings upon DraftKings stock. Canaccord Genuity analyst Michael Graham reaffirmed his “buy” rating, for example, while raising his price target from $35 to $50.
In a similar vein, Susquehanna analyst Joseph Stauff increased his price estimate from $33 to $48. Given the stock’s swift ascent in price, don’t be surprised if more Wall Street experts soon join Graham and Stauff in revising their targets for DraftKings stock.
The Takeaway on DraftKings Stock
Cramer’s bullish recommendation on the stay-at-home trade seems reasonable enough. DraftKings stock is part of this trade and its price momentum has been powerful.
In-game betting is now a notable phenomenon, and the expansion into more U.S. states presents a potential catalyst for DraftKings. And so, while the stock’s high valuation might not be justifiable, it is at least understandable.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.