If you had DraftKings (NASDAQ:DKNG) as the only name in your portfolio, you’d hardly guess that a pandemic has brought the world to its knees. Between the beginning of April to the end of May, DraftKings stock more than tripled in value.
Although it initially tripped badly due to the impact of the novel coronavirus, DKNG has remarkably set aside any headwinds.
Much of that has to do with states gradually reopening their economies, which set the stage for the return of sports. And as the weather warmed, more states followed suit, drawing more excitement regarding pent-up demand. This was most evident over the Memorial Day weekend, with big crowds seemingly suggesting that Americans were ready to reclaim their lives.
Not surprisingly, DraftKings stock moved from strength to strength as incoming news were more favorable than not. Of course, the biggest catalyst was major sporting leagues either announcing a summer reopening or plans for such. Though there won’t be any fans in attendance, demand theoretically should be massive.
After all, with millions cooped up in their homes for months, people are ready for live events. As well, a person can only watch so much Netflix (NASDAQ:NFLX).
Importantly, early signs are very encouraging on many levels for DraftKings stock. When NASCAR returned to racing at Darlington, 6.32 million people tuned in. That’s incredibly competitive, considering that the league’s flagship event, the Daytona 500, attracted 7 million viewers earlier this year.
Stock car racing isn’t everyone’s cup of tea. That so many folks were willing to watch cars exclusively make left turns is a great sign that DKNG’s rally is no fluke.
DraftKings Stock Isn’t the Best Tactical Play
For optimists, so many pieces of evidence exist to support the bullish case and they largely center on the theme of reclamation. Even with the specter of the coronavirus lingering in the air – figuratively and literally – humans are not built to cower in fear indefinitely.
Across the Pacific, Disney’s (NYSE:DIS) namesake theme park in Shanghai opened last month to substantial fanfare. In fact, Time reported that tickets sold out within minutes of going online. Despite infection concerns and a significantly mitigated experience, Chinese consumers were ready to move forward.
So far, we see the exact same sentiment here. Thus, the common logic is that DraftKings stock will continue trekking higher.
Yet I don’t think I’m alone in appreciating the catalysts but not liking the price tag. It’s not just that the DKNG is overheated, although every technical indicator suggests as such. Rather, the backdrop is hardly desirable.
Specifically, I’m referring to the state of our economy. As long as powerhouse states like California and New York remain mitigated, it will be incredibly difficult for small businesses – the engine of U.S. economic growth – to start the process of rebuilding. While we’re in this crisis mode, we won’t be interested in taking unnecessary monetary risks.
To no one’s surprise, big purchases such as car sales are down significantly on a year-to-year comparison. With consumers not knowing what tomorrow may bring, they’re not going to risk their funds. As CNBC noted recently, the personal savings rate hit 33%, an all-time high since the government started keeping records.
Again, this tells you that people are worried, adopting a crisis-mode mentality. In this environment, DraftKings stock, which relies on sports fans placing wagers, doesn’t come across as a great read.
A Second Black Swan?
I think I speak for everyone when I say that the Covid-19 pandemic is a black swan event. While the global economy wasn’t exactly without weaknesses prior to the crisis, it was still manageable. Now, it’s a completely different story.
But just as we were taking those first important steps toward recovery, nationwide protests broke out as anger erupted over a Minneapolis police officer murdering George Floyd while in custody. Unfortunately, the anger spilled over into rioting and lawlessness, with multiple cities succumbing to unparalleled criminality.
That in and of itself is a risk to professional sports returning because of safety concerns. However, with hundreds of thousands of rioters spreading havoc without obviously observing social distancing guidelines, we could see another outbreak of coronavirus.
If we do, that may see states shut down their economies again. Certainly, you’d expect to see many sports leagues call it a season and wait for the next one. And that could send DraftKings stock down in a hurry.
Please hear me correctly – I’m not saying this will happen. But with the rampant lawlessness, it’s very possible that it could happen. With that and the economic variable, I want to wait out DKNG until we get better signals.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
