Examining DraftKings’ Competition

Live sports shut down cold in March. One week before college basketball’s famed March Madness tournament was set to tip off, major sporting events suddenly ceased as various officials sought to slow the spread of the novel coronavirus.

DraftKings Stock Will Get a Draft From Its Secondary Offering

Source: Lori Butcher/Shutterstock.com

Now, after months of waiting, it appears that sports are about to return. And for investors looking to benefit from sports betting, the return of sports is welcome. In fact, traders have bought DraftKings (NASDAQ:DKNG) stock aggressively in recent weeks in anticipation of the resurrection of sports.

Major League Baseball has had labor issues aside from the coronavirus. However MLB appears set to start getting back into the swing of things at the beginning of July. The National Football League is making plans to hold games with limited fan attendance. And pro basketball is trying to salvage the 2020 season, though there’s less clarity on how exactly that will work.

Still, it seems, there will be considerable live action sports returning again soon. And that will give DraftKings and other sports gaming companies an opportunity to prove their worth to investors.

DraftKings Versus FanDuel: The Rivalry Continues

DraftKings is not the only company vying for the upcoming flood of sports-betting dollars.  Around five years ago, DraftKings and FanDuel ran a huge number of TV ads promoting their fantasy-sports offerings. However, over time, DraftKings pulled ahead. If you read accounts such as Albert Chen’s Billion Dollar Fantasyyou might come away with the idea that DraftKings decisively crushed FanDuel.

FanDuel’s brand has lost a bit of its power. However, don’t count on that trend lasting, as FanDuel hasn’t disappeared by any means.

Rather, FanDuel merged with Irish bookmaker Paddy Power. The combined company renamed itself Flutter Entertainment (OTCMKTS:PDYPY). Last year, Flutter added to its gaming muscle, picking up the Stars Group in a multi-billion dollar deal. That allowed Flutter to enter the poker, online sports betting, and traditional bookmaking markers.

The market is liking what it sees; Flutter’s stock has doubled over the past year and just reached new all-time highs. So make no mistake ; once live sports are back, FanDuel should be able to launch a vigorous war for market share against DraftKings once again.

Don’t Forgot the Portnoy Effect

But FanDuel isn’t the only potential issue for DraftKings. There’s also Penn National Gaming (NASDAQ:PENN), which recently acquired Barstool Sports. Through that transaction, Penn obtained the charismatic Dave Portnoy, who has become a key spokesperson for its brand. Portnoy has taken to day trading stocks recently and has become quite the celebrity. He’s appeared on CNBC and other mainstream investment channels, while his videos rack up tons of free media attention for Penn.

Last month, I wrote that Portnoy was garnering a great deal of publicity for Penn.   And Penn’s stock has nearly doubled since then, as the company has benefited from both the reopening of the economy and Portnoy’s increased popularity.

Portnoy recently vowed to return to sports betting as soon as live sports are back in business.  He is going to lead his army of traders who are following his every move to Penn’s media and gaming ecosystem. That could hurt DraftKings’ revenue and drive up its marketing expenses.

DraftKing’s SPAC Overhang

One other element of the story is that DraftKings went public via a special purpose acquisition company or SPAC. A SPAC offering allows a company to go public at $10 per share with much less scrutiny than it would face if it underwent a traditional initial public offering. Companies that use SPACs tend to be of low quality and perform poorly over the long haul.

However, SPACs have gotten hot again this year, with companies like Virgin Galactic (NYSE:SPCE) and Nikola (NASDAQ:NKLA) listing their shares through the mechanism. So the usual disdain for SPACs has been alleviated.

Still, why didn’t DraftKings want to raise more money via a well-respected, traditional IPO? Does it have some baggage that would have come to light with more scrutiny? Or perhaps banks had reservations about underwriting an IPO by DraftKings.

The Verdict on DraftKings Stock

Right now, it’s easy to imagine that the future will be exceedingly bright for DraftKings. There have been no major sports or sports betting for months, so there should be a surge of betting activity once sports resume. Expect DraftKings’ next few earnings reports to be home runs.

But DraftKings is still a fairly new company that faces tough competition, and its market capitalization is huge already. As a result, over the longer term,  the shares could retreat. As a result, I agree with Thomas Niel, who urged investors to wait for the excitement about the stock to cool a bit before plunging into the name.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/examining-draftkings-competition/.

©2021 InvestorPlace Media, LLC