Those who trade the shares of sports-betting hotshot DraftKings (NASDAQ:DKNG) have, depending on their position and timing, done well. Quick gains might lure folks into betting the house on DraftKings stock, but is it smart to buy the shares now?
It’s awfully tempting to get caught up in the hype, as e-gaming is a red-hot market at the moment. People are cooped up in their homes more, so some are turning to gambling as a way to release some tension and dispel their boredom.
DraftKings and its shareholders, naturally, have been beneficiaries of this trend of late. So, does it make sense to gamble on DraftKings after its shares rallied tremendously and then gave back some of its gains?
A Closer Look at DraftKings Stock
A big-picture view of DraftKings stock would suggest that the stock’s uptrend is intact. After all, its share price rallied hard from $11 and change to more than $40 in recent months. For that reason alone, it’s not advisable to short the stock.
That being said, the price action looks more like a falling star than a rocket ship to the moon. Since the beginning of June, DraftKings stock has been sputtering out. The week ending on June 26 was especially harsh on the owners of the shares, as it sank more than 25%.
Thus, to buy DraftKings at its current price would likely mean participating in a dip after a major melt-up. That is the opposite of buying a bargain-priced stock right after the sellers are exhausted. Instead, anyone who buys DraftKings now would be purchasing an expensive stock after the buying activity has evidently petered out.
Are the Fundamentals Irrelevant?
When stocks like this soar, it raises the question of whether fundamental matters like cash flow, economic moat and so on are even relevant anymore.
The idea that value isn’t a valuable metric anymore might be disheartening to some investors. Yet, that’s the reality of the situation, and investors should adjust their strategies accordingly. InvestorPlace contributor Nicolas Cahine provides excellent advice for folks trying to grasp the irrelevance of traditional metrics:
“Fundamentally, DraftKings stock is definitely not cheap. But this is the growth phase, so value is not a concern at this point. During the developmental phase investors need to see past the current situation. Therefore, it is best to get help from the only truth and that is its actual stock price.”
That isn’t to say that we shouldn’t look at DraftKings’s financials. To a certain extent, though, the company defies examination on that level. For example, there’s no trailing 12-month price-to-earnings ratio to look at because the company was unprofitable last year.
A Tough Bet to Win
Perhaps some of the mega-rally of DraftKings shares stemmed from the assumption that the major sports leagues will resume playing. As a result, big-time sporting events will return, and people will bet on them.
That’s great for DraftKings’ business model, but keep in mind that the stock market is extremely forward-looking. The reopening of sports events across the U.S. has, most likely, already been priced into the shares.
Another catalyst has little to do with DraftKings as a company, but instead involves the gambling mindset of many of today’s market participants. Some of the same folks who like to trade DraftKings stock have adopted, to a certain extent, a sports-betting frame of mind.
But the stock market isn’t sports betting, even if some folks choose to treat it as such. Companies’ valuations will come into play at some point, even if sheer euphoria prevails in the short-term.
The Bottom Line
Could the rally of DraftKings stock resume at any moment? It certainly could, but until the stock and its traders mature, it’s not a sure bet by any means.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.