In the wake of worldwide lockdowns, online gambling has become a favorite sector among investors. One firm that’s been capitalizing on that trend is DraftKings (NASDAQ:DKNG), whose share price has skyrocketed over the past few weeks. DraftKings stock is up 230% so far this year as the outlook for the industry draws attention from profit-seekers.
There’s certainly a case to buy DKNG stock — it has a ton of potential to become a winner in the online sports betting industry. But much of the optimism about DraftKings’ future has already been priced in. The stock’s epic climb so far this year makes it worth sitting on the sidelines and waiting for a pullback.
DraftKings Stock Isn’t All Bad
Many see online gambling, particularly through sports betting, gaining traction in the U.S. While sports are still mostly offline due to the novel coronavirus, it’s only a matter of time until games are back on TV. The reintroduction of sports without crowds could be a major turning point for sports betting in the U.S. as sports fans look for new ways to connect.
Currently, only 18 states allow sports gambling, and many of them require people to visit a casino in order to place their bets. In 2018 the Supreme Court relaxed its sports betting rules. Since then, the dominoes across the country have started to topple. Now that many states are in need of new revenue to cover immense coronavirus spending, we could see online gambling restrictions loosen.
That will be a boon for online betting websites like DraftKings. As legalization spreads to new states, the online sports betting market is seen ballooning to roughly $18 billion. Eventually, online gambling is seen growing into a $21 billion market annually.
Sports Betting Faces Stiff Competition
DraftKings has had a lot of success in the online gambling market. In New Jersey, for example, the firm has become one of the top two online betting sites. That’s impressive considering the state is also home to several brick-and-mortar casinos.
But it’s important to note that DraftKings is one of many operators. The company is vying not only with on-the-ground casino operators like Las Vegas Sands (NYSE:LVS), but it’s also competing with other online betting players like Penn National (NASDAQ:PENN). Looking further afield, DraftKings and Penn National are small potatoes compared to European online gambling behemoths like William Hill (OTCMKTS:WIMHY) and Flutter Entertainment.
Sports betting in the United Kingdom is far more popular than it is in the U.S. and the industry is much more mature. That means players like William Hill and Flutter know what to expect. They also have a better roadmap for success. That’s not to say that DraftKings can’t capitalize on it’s younger audience and fantasy sports following, but it’s definitely something to consider before jumping in with both feet.
Penn National Is a Better Play
If you’re looking for a sports betting investment, there are others that aren’t surrounded by so much hype. Penn National is one such choice. Its recent stake in Barstool Sports puts it in a unique position to take the online gambling world by storm.
Throughout the pandemic, Barstool Sports’ Dave Portnoy has made a name for himself. He symbolizes a group of sports gamblers who have now embraced day trading. His viral investing videos and outspoken social media comments have garnered a lot of attention among sports bettors who’ve turned to the stock market since March.
Portnoy’s foray into the stock market has been a powerful marketing tool for PENN. It could help the firm capture market share as sports betting picks up.
The Bottom Line
While DraftKings stock looks well-positioned to benefit from a rise in online gambling among Americans, the hype is a red flag for me. Even if online gambling takes off as some are expecting, there’s no guarantee that DraftKings will have the largest slice of that pie.
Plus, there are a lot of uncertainties when it comes to online gambling in America. Not only does it depend on a series of regulatory changes across multiple states, but it depends on the population itself. Pandemic-related job losses and pay cuts mean people will have less to spend on leisure activities like gambling.
With that in mind, DraftKings looks too expensive. In the event of another major pullback, it could be worth buying. But for now, it appears to be all hype.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
