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Why DraftKings Stock Still Looks Risky

With Major League Baseball, the NBA, and the NFL all looking set to possibly start playing soon, the outlook of DraftKings (NASDAQ:DKNG) has improved. Still, the three leagues’ players could still decide not to participate this year. Or they could stop playing after a short time. Those risks, combined with the huge gains of DraftKings stock in recent months and its high valuation, make the shares a sell for now.

DraftKings Stock Will Get a Draft From Its Secondary Offering
Source: Lori Butcher/Shutterstock.com

Sports Are DraftKings’ Bread and Butter

As I explained in my last column on DraftKings, the company’s bread-and-butter business is fantasy sports, while online-sports betting is its growth catalyst. Its other major business is online casino-game betting, which is not legal in any large state.

Further, the company faces a great deal of competition in that sector. Barron’s reported that the company has less than a 20% share of the online casino games market, and just over 30% of the sports betting market.

That makes DraftKings very dependent on fantasy sports and online-sports betting. Consequently, it’s very dependent on America’s most popular sports leagues: the MLB, the NBA and the NFL.

Plans Could Fall Through

Luckily for sports fans and the owners of DraftKings stock, it looks as though all three leagues could start playing soon.

The NBA is to restart its season in late July in Orlando, Florida. Players who decide not to participate in the season will lose only a fraction of their salaries. Already at least three players – Portland’s Trevor Ariza, the Los Angeles Lakers’ Avery Bradley and Washington’s Davis Betans – have said they’ll sit out. Another Laker, Dwight Howard, may also decline to participate.

The Brooklyn Nets’ Kyrie Irving has openly opposed the relaunch and has tried to convince other players to join him in launching a separate league. He reportedly recently led a conference call of about 80 players who wanted to hear his views on the issue.

Major League Baseball’s owners sought to impose a 60-game season on the players, which was their right under an agreement they reached with the players’ association in March. On June 23, the players’ association agreed to the owners’ health and safety protocols and said that players would report to their teams on July 1. As a result, MLB says it’s ready to play ball starting on July 23 or July 24.

But ESPN cast doubt on whether the season will be successful. “The season’s success probably depends on MLB’s ability to contain coronavirus spread,” the network stated.

Judging by the case of the Philadelphia Phillies, that could be a very difficult task; five of the team’s players and three of its other personnel have tested positive for the virus.

Finally, the NFL still reportedly plans to start its season on Sept. 13, as previously scheduled. However, according to NBC, “the NFL Players Association urged players to stop working out together following a rash of positive COVID-19 tests.” Moreover, several NFL teams reportedly want to delay the start of the season.

Clearly, there’s a great deal of risk that one or all of the leagues won’t resume playing on schedule.

The Players Don’t Have Much Incentive to Participate

Importantly, from a commonsense point of view, it’s easy to see why players could decide to sit out the season. The players, of course, are not at all in the same situation as meatpackers, grocery store employees and restaurant workers who have to work to make ends meet.

Many players are multimillionaires and the leagues’ stars are worth $100 million or more; none of the players will have to miss any meals, and the vast majority will not have to sell any of their expensive cars or vacation homes if they sit out the season. As a result, the majority may decide that they would rather stay home than risk getting themselves and their families sick.

Further, even if the seasons do start on time, the players and/or the leagues could easily quickly fold up shop if new cases in some states continue to accelerate or if a high number of players start catching the virus.

The Bottom Line on DraftKings Stock

Although the company’s outlook has improved because the leagues now have concrete plans to resume playing, they may not wind up playing many games in the next six months.

Further, DraftKings stock has surged about 80% since May 7 and has a price-earnings ratio of 700. Given these points, I’d recommend taking profits in the name at this point.

As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/why-draftkings-stock-still-looks-risky/.

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