The popularity of DraftKings (NASDAQ:DKNG) is unmistakable. DKNG stock opened trading for the time April 24 at $17.81. In a little more than a month, it’s up 194% at a time when the novel coronavirus has benched major sports.
The fervor at which investors have embraced its stock isn’t all that surprising.
It’s got a great business model that saw a 30% year over year increase in revenue in the first quarter despite Covid-19. Most people consider DraftKings a one-trick pony, the only U.S.-based vertically integrated sports betting operator, but its results through the first three months of the year provide damning evidence that it’s so much more.
“We are uniquely positioned at the intersection of digital sports entertainment and gaming in a rapidly growing industry,” DraftKings co-founder and CEO, Jason Robins, said in its May 15 press release. “DraftKings recorded standalone Q1 year-over-year revenue growth of 30% despite the effects of COVID-19.”
Before we get ahead of ourselves, let’s remember that DraftKings’ operations lost 75 cents per dollar of sales this past quarter, up from 44 cents a year earlier. As it scales, things are going to get worse before they get better.
A Closer Look at DKNG Stock
That said, I’d much sooner lay a bet on DKNG than I would Wayfair (NYSE:W), a company that’s addicted to advertising and may never make money. It lost 11 cents this past quarter per dollar of sales.
I might be wrong, but DraftKings seems to be the perfect mix of a business with strong consumer demand and interest, combined with the technological savvy to deliver a customer experience that is through the roof.
It’s a potent combination to have. Not many possess it.
If you don’t know the story behind DraftKing coming public, it did a three-way merger with SB Tech, a company that specializes in sports betting and iGaming platform solutions, and Diamond Eagle Acquisition, a special purpose acquisition company (SPAC) sponsored by veteran Hollywood executives Jeff Sagansky and Harry Sloan.
What’s a SPAC?
People with stellar reputations like Sagansky and Sloan convince a bunch of investors to plunk down money in a company that has no assets but intends to use the funds raised to buy a company in one or more industries within 24 months. If they don’t find one to buy, the money is all returned to investors with interest less a small amount of operating capital used while searching for the next diamond in the rough.
They used to call them blind pools and they didn’t have a great reputation. But now that the entire private equity industry is one giant blind pool, the taint is gone. Of course, successes from Sagansky and Sloan don’t hurt.
Diamond Eagle Acquisition was Sagansky and Sloan’s fifth SPAC. It raised $400 million from investors. The previous four raised $1.6 billion. In March, the duo did a sixth SPAC raising $600 million for Flying Eagle Acquisition (NYSE:FEAC).
Is a billion-dollar raise in the making? I think the odds are good. As long as investors have heartbeats, Sagansky and Sloan have proven to be a winning tandem.
The Bottom Line on DKNG Stock
There are two things I don’t tend to do: Buy stocks in money-losing companies and invest in SPACs.
As for the first don’t, I have recommended money losers before. I was recommending investors put a small sliver of their portfolios in Tesla (NASDAQ:TSLA) way back in 2012, and even though I don’t always agree with some of the things that come out of Elon Musk’s mouth, he’s a brilliant tactician and visionary. Few, if any, can match his energy.
There have been others, many of them in the cloud space where it’s still early days. Rarely though, have I been so caught up by a consumer-oriented money loser. Yes, SB Tech gives it a tech side, but the big cabbage, as they say, will be made from legalized betting across all 50 states.
And heck, if it can add sales when sports are idle, it’s got to be worth serious consideration — doesn’t it?
As for investing in SPACs, Sagansky and Sloan seem to have figured out how to evaluate talent better than most. Anyone can make acquisitions, but the ones who can spot talent, they’re the ones to ride to victory if you’re considering putting money down on a future offering.
The duo has put SPACs back in the eye of investors. I hope they stick around. Betting on talent is so much more interesting than businesses or ideas.
DraftKings has definitely become the poster child for the category.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
