Keep Valuation in Mind Before Chasing DKNG

DraftKings stock has a strong runway, but shares may be a better buy once the excitement cools

As shares top out between $40 and $45 per share, what’s next for DraftKings (NASDAQ:DKNG)? As I noted in my prior write-up on DraftKings stock, the sports betting legalization “megatrend” means big potential for this “first mover” in the space. Major sports leagues may have been on hiatus due to the novel coronavirus. But, with the NBA set to resume game-play, and this fall’s NFL season still on schedule, sports bettors should expect a full wagering menu just around the corner.

Draftkings stock
Source: Lori Butcher/Shutterstock.com

Pent-up demand from the Covid-19 lockdowns could mean strong performance for all sportsbooks. But, the larger factor to consider is the continued legalization of sports betting across the country. Prior to 2018, Nevada was the only state in which you could legally bet on sports. After that year’s Supreme Court decision legalizing it across the country, states like New Jersey quickly opened up legal sportsbooks and betting apps.

In the years since, other states have opened their doors as well. Now, 17 states have legal, regulated sports betting operations. And that number is expected to climb.

It’s safe to say this industry has plenty of runway. But, with high competition, and a rich valuation, DraftKings may not be a buy at today’s prices. Despite its vast potential, your “best bet” may be to hold off for now, taking a position after today’s speculation starts to cool.

Why DraftKings Stock Remains Richly Priced

The growth runway remains long for DraftKings. Yet, it’s not as if the company is the only player in the space. Not only does it compete with U.S.-based casino companies like Penn National (NASDAQ:PENN), other global sportsbook names have thrown their hat in the ring. These include William Hill (OTCMKTS:WIMHY), as well as Flutter Entertainment (OTCMKTS:PDYPY), which owns DKNG’s longtime rival, FanDuel.

So, why are shares such a hot stock right now? Chalk it up to the fact that this stock, along with PENN stock, are the only sports wagering plays widely available to investors.

William Hill and Flutter both trade over-the-counter. In other words, out of reach for many retail and institutional investors. It’s a similar dynamic to what’s going on with Beyond Meat (NASDAQ:BYND) stock. Investors have bid shares to a rich valuation, as it’s the only way to play that particular trend.

Yet, this overvaluation could continue. As investors keep bidding up hot stocks, ignoring valuation, shares could reach higher prices on just a breadcrumb of good news. With this in mind, it may not be wise to go short this name right now. In a market where it seems headlines trump fundamentals, you could lose big, as irrationality can easily outlast your solvency.

Nevertheless, shares could soon take a breather. With a secondary offering on the horizon, many who bought at lower prices may soon start taking profits.

A Matter of Timing for DKNG

Speculators aren’t the only ones looking to cash in on DraftKings’ epic performance. As Barron’s reported June 17, the company is prepping for a secondary offering. And it’s not just selling new shares to raise cash. Insiders are also planning to sell shares as well.

This means shares could fall in the short term for two reasons. First, raising new equity brings dilution. In other words, your piece of the pie is about to get smaller. That will reduce the upside potential for the stock.

Second, it’s concerning insiders are looking to take some of the chips off the table. This could imply they find shares today to be overvalued and that the company’s stock price probably won’t rise much higher from here.

With both these factors in mind, it makes sense InvestorPlace’s Dana Blakenhorn recently said to “look out below” when it comes to DraftKings stock. It’s the company’s potential, not its actual results, that are driving GKNG’s performance. If things fail to live up to expectations, expect shares to fall back to where they were before their hot streak started back in April.

Hold off on DraftKings Stock for Now

I’m not alone in taking this cautious approach to DraftKings stock. Our own Matt McCall earlier this month called it a “great idea at a bad price” right now. With a rich valuation, and a secondary offering in the works, the odds currently aren’t in your favor.

Also, its unclear how much market share this budding sports wagering giant will wind up taking. So, what’s your best bet right now? Stay on the sidelines with DraftKings stock, and wait for a better entry point.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/keep-valuation-mind-before-chasing-draftkings-stock/.

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