So far it has been a good spring for investors in sports betting platform DraftKings (NASDAQ:DKNG) stock. Since going public in late April, DKNG stock has more than doubled.
Now investors are wondering if the run-up in the share price can in fact continue in the rest of the year, too. Today I’ll take a closer look at the company to see whether it should belong in a long-term portfolio.
If you have participated in the recent increase in the DraftKings stock price, then you may want to ring the cash register. Let’s see why.
DraftKings Stock Went Public in April
DraftKings started life in 2012 as a daily fantasy sports (DFS) platform. According to the The Fantasy Sports & Gaming Association, there are more than 60 million fantasy sports players in the U.S. and Canada. The Association states “as of April 2020, 21 states have enacted laws to confirm that fantasy sports are legal games of skill.”
In late April 2020, DraftKings went public via a special-purpose acquisition company (SPAC), instead of conventional IPO. It merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded, and SBTech.
SPACs are so-called “blank check” publicly traded firms. They have either no or limited operating assets. By merging with a SPAC, a company can avoid going through as many hurdles to go public or sell new shares. Regular InvestorPlace readers may remember that Virgin Galactic (NYSE:SPCE) had also gone public through a SPAC transaction.
Diamond Eagle Acquisition Corp. listed in 2019 at $10 a share. In Dec. 2019, the group announced that it would merge with DraftKings. As part of the deal, Diamond Eagle changed its name to DraftKings and also changed its ticker. In a matter of months, Diamond Eagle shares moved as high as $18.69.
Boston-based DraftKings stock was officially listed on the New York Stock Exchange on April 24. The stock opened at $20.49.
Long-Term Tailwinds for DraftKings Stock
2018 was an important year for the evolution of DraftKings’ business model.
In May 2018, the U.S. Supreme Court struck down the Professional Amateur Sports Protection Act (PASPA), the federal law that had essentially limited sports betting to a number of states, i.e. Delaware, Montana, Nevada, and Oregon, for the last 25 years. As a result, other states got the green light to establish their own regulated sports betting.
Following the ruling, DraftKings CEO Jason Robins said legalized sports betting would become a big industry. Fantasy game providers now have more options to allow gambling, as people can gamble on the outcome of games or point totals.
Recent research concludes that between 2020-2024 the U.S. fantasy sports market is expected to grow by $9.34 billion at a compound annual growth rate (CAGR) of 10%. Similary, the U.S. sports betting market is expected to hit $5.7 billion by 2024.
At present DraftKings and FanDuel, which is part of the UK-based Flutter Entertainment (OTC:PDYPY), are the two main platforms for sports and sports fantasy betting.
Therefore those investors who want to capitalize on the potential of sports betting as well as the growth in fantasy sports in the U.S. may want to consider doing further due diligence on DraftKings stock.
Profit-Taking Could Derail DKNG Stock Short-Term
The Street initially debated the timing of going public in the midst of the global pandemic. After all, there have been no live sports to bet on for some time now. Yet on June 2, DraftKings stock hit an all-time high of $44.79. Now it is hovering around $40.
As a result of the stellar run-up in the stock price in about six weeks, I expect some profit-taking in the shares soon. In fact, over the past few days, the shares are down about 7% from the all-time high it on June 2. DraftKings stock charts suggest the fall may continue in the coming days, possibly toward the $35 level.
The company’s growth projections and hence the stock price rely on an increasing number of people betting on sporting events. But until sports resume, there cannot be much revenue for the group. DraftKings also needs to be licensed in more states across the country.
In mid-May, the group released its first quarterly statement. Revenue increased 30% YoY. However, it also reported a net loss more than twice as high as a year ago.
If the company cannot generate revenue to justify the current valuation levels, then investors could easily hit the “sell” button.
Investor Takeaway
Given the uncertainty regarding when sports will fully be back in our lives, DraftKings stock is likely to be highly volatile with a potential downward bias in the short run.
Are you one of those early investors who took a chance on the company’s stock? If you’ve been rewarded handsomely early on, then you may want to take some money off the table.
If you’re considering investing in DraftKing stock now, you may want to see how the next several quarterly reports will come out. With a newly-listed company, it is important to see the trend in its fundamental metrics.
Such a wait may also be important if our economy does not pick up as fast as initially priced in by the equity markets. Growth companies like DraftKings tend to burn through cash extremely fast. In case the company does not generate enough revenues, it may easily run into financial headache.
Alternatively, you may consider initiating an ATM covered call position. For example, a July 17 expiry covered call would decrease the volatility in your portfolio and offer some downside protection. It’d also enable you to participate in a potential up move.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
