DraftKings Faces Headwinds as Sports Tentatively Resume

DraftKings (NASDAQ:DKNG) stock shed 13.16% of its value last month. I was bullish on the stock’s prospects in my previous article, but recent developments in the betting world have compelled me to re-think my position in DraftKings stock.

DraftKings (DKNG) logo, magnified, on its app.

Source: Lori Butcher/Shutterstock.com

The legalization of online sports betting in New York still hangs in the balance. Moreover, 18 to 22% of the company’s revenues from New Jersey come from New York residents. Also, MGM Resorts’ (NYSE:MGM) BetMGM, a direct competitor to DraftKings and Fan Duel, is set to become a significant player in the industry with over a $450 million cash injection in its business.

On a positive note, some sports are finally restarting, which will positively impact the business. However, there are significant headwinds for the company, which is likely to impact its long-term market share.

Let’s look at the DraftKings situation in a little more depth.

Sports Are Back … Somewhat

The sports world was brought to a stand-still when the novel coronavirus engulfed the world with a crippling effect. Several sports leagues either paused or canceled its seasons without providing any outlook on when things could potentially resume. However, in the past few weeks, certain sports leagues such as the NBA, UFC, EPL, and others have tentatively restarted.

It will be interesting to see how things progress, considering how a potential second wave of the novel coronavirus could bring things back to square one.

DraftKings runs daily fantasy sports contests where players can compete against a group for a designated prize. The participants are supposed to pay a fee, and usually, the prize money awarded is lower than the amount collected.

The aforementioned sports leagues are all going about things differently. The NBA is planning to have games every day when it restarts on July 30 in Orlando. All teams will be staying at the Disney (NYSE:DIS) resort. This provides a unique opportunity for DraftKings to benefit from the increased volume and create more teams to enter the competition.

Headwinds

There are a lot of headwinds for DraftKings and other players in the online sports betting industry. Firstly, New York continues to be a thorn in the side of the industry. Currently, physical sports betting is legal in four upstate commercial and Indian casinos, and none of them have performed in line with expectations.

Additionally, it continues to leak revenues over the river. New Jersey derives between 15-22% of its 2019 sports betting handle of $4.5 billion from New Yorkers. The legalization of online sports gambling is still up in the air as New York Governor Andrew Cuomo continues to be vehemently against an amendment. The fate of the amendment lies in the hands of the lawmakers, and it’s difficult to say which way things will turn.

Furthermore, the competition in the industry is real and will ultimately dilute the market share of existing players. MGM and GVC Holdings Ltd, the UK-based betting giant, have injected $450 million in its digital product, BetMGM. BetMGM can become a significant player in the online sports betting world with its financial firepower soon. BetMGM is spending heavily on its media budgets to mount pressure on the existing players in the industry.

The inclusion of new companies in the industry will continue to saturate the market, with none expected to have more than 20% share.

SPAC Size and Its Impact

73% of SPAC (special-purpose acquisition company) stocks have fallen as per the latest SPAC research. DraftKings is among a long list of companies that combined with SPAC foregoing a traditional IPO. However, off late such stocks are taking a beating in the market.

Most experts believe that SPAC’s with sizable funds in their trust accounts will be better off in the long run. Larger SPAC’s typically have institutional connections that give them the financial cushion they need in raising capital consistently. Smaller SPAC’s have relatively low funds in their accounts and typically have a lot of trouble in raising money.

DraftKings merged with Diamond Eagle Acquisition Corp (NASDAQ:DEAC), which has a market cap of $500 million. According to its first-quarter results, Diamond Eagle has $405 million in total assets. This is a sizable number, and I feel that the company should be considered as a large SPAC. Therefore, the risks of investing in DraftKings stock are relatively low.

Bottom Line on DraftKings Stock

DraftKings has a lot to consider as it prepares to maximize on the tentative reopening of a few sports leagues. New York remains a problem, and BetMGM and other competitors are lining up to establish their presence in the online sports betting industry.

I’m not overly optimistic about DraftKing stock’s potential in the longer run. I prefer a short position on the stock or play the waiting game until things become clearer in the market.

As per this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/draftkings-stock-faces-headwinds-as-sports-resume-tentatively/.

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