Look Out Below When It Comes to DraftKings Stock

DraftKings (NASDAQ:DKNG) is both a company, and a stock, designed to draw gamblers.

draftkings stock

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The stock went public in April after it merged into a placeholder company called Diamond Eagle. Since then, it has been on fire, rising more than 110%. It opens June 15 at $35.65 per share, and boasts a market capitalization of $11.3 billion.

Overall, what you’re getting a piece of is $323 million in 2019 revenue — of which almost $144 million was a dead loss. 

That said, you’re mostly getting hope and hype.

The Hope for DraftKings Stock

DraftKings started as a fantasy sports league, a substitute for sports betting. A 2018 Supreme Court decision held out hope for the real thing.

Since then, 18 states have legalized sports betting, but the rules differ state-to-state. In most places, you must go to a casino to make a wager, as most of the bills covering online betting have been stalled.

However, online sports betting is what DraftKings bulls are betting on. In going public, DraftKings acquired SBTech, an online sports betting technology outfit. The deal, arranged in December, was valued at $3.3 billion.

Moreover, the expectations for DraftKings’ second-quarter earnings later this year are interesting. Analysts are expecting revenue of $52.3 million and another per-share loss. Yet, the stock continues to rise. One analyst calls it an “incredible value play,” while several others have raised price targets. 

Even without value, DraftKings has enough market cap to talk about buying Bleacher Report from AT&T (NYSE:T), which needs to reduce debt.  Bleacher Report, which started as an online discussion site, has become a broadcaster under AT&T’s Turner Sports unit.

What Are Investors Buying?

Analysts aren’t buying results. They’re buying the SBTech platform and the hope that DraftKings will be handling billions of dollars in action. This includes not just game results, but in-game betting — which, according to CEO Jason Robins, represents about three-quarters of the action in the UK.

In England, I’ve seen advertising boards offer odds on which player might get the next goal in a soccer match. Sports books and online casinos often also have their names on players’ shirts. With that in mind, Robins says baseball is especially well-suited to this kind of betting, as there are natural stoppages in play. (If you ask me, the whole game is a stoppage in play.)  For example, in a recent charity golf event featuring Tiger Woods and Tom Brady, viewers saw DraftKings odds for who would win each hole.

Collectively, even with sports shutting out fans due to the novel coronavirus, the stock keeps rising. DraftKings is now the second most-valuable U.S. gambling stock, ahead of such stalwarts as MGM Resorts International (NYSE:MGM), Wynn Resorts (NASDAQ:WYNN), and Eldorado Resorts (NASDAQ:ERI). The only vaguely-comparable opportunity is Penn National Gaming (NASDAQ:PENN), which is worth about $4 billion and is still mostly a casino operator.

The Risks for DraftKings Stock

If Americans are like Brits, and if laws eventually adopt to the British model, DraftKings can grow into a large market. Gambling there is a roughly $16 billion industry, with about $6 billion of that “remote” or online.

However, this is also the risk. There are many online gaming companies in England with real sales . The largest, Flutter Entertainment (OTCMKTS:PDYPY), bought DraftKings’ one-time rival, Fanduel, in 2018. Furthermore, Flutter is worth $21.2 billion, nearly twice the value of DraftKings. It had revenue of $2.14 billion last year and $144 million of net income.

The Bottom Line on DKNG Stock

Overall, even if the U.S. sports betting market opened tomorrow, DraftKings would not have the market to itself.

The technology for sports betting isn’t difficult to create. Flutter Entertainment is already scaled to handle the action. Therefore, U.S. casino companies could quickly ramp up if legal action were available.

Even if it were all legal, Flutter brings less than 10% of revenue to the net income line. Las Vegas Sands (NYSE:LVS), the dominant U.S. casino company, brought just 19% of revenue to the net income line last year.

The amount of legal sports betting Americans will do is unknown, and the amount they’ll do online — even in 2021 — is impossible to estimate. DraftKings is currently valued at more than five times Flutter’s 2019 revenue.

So when the betting action starts, punters will take profits and you’ll be left with less than you think.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhornAs of this writing he owned no shares in companies mentioned in this story.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/look-out-below-when-it-comes-to-draftkings-stock/.

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