After DraftKings (NASDAQ:DKNG) stock tumbled 6.5% on July 27, the shares of the online sports-betting company are looking more and more like a gamble themselves.
Specifically, those who buy shares at this point are betting that the novel coronavirus won’t torpedo the seasons of America’s popular professional sports leagues. And that’s looking like an increasingly risky bet.
Why DraftKings Stock Plunged
The shares sank after over 12 players on the Miami Marlins roster tested positive for the coronavirus, prompting Major League Baseball (MLB) to cancel two games on July 27. In addition to the scheduled game between the Marlins and the Baltimore Orioles, MLB postponed the slated match-up between the Philadelphia Phillies, who had played the Marlins over the previous weekend, and the New York Yankees.
The news was indeed bearish for DraftKings stock, as MLB is the only mainstream U.S. sports league active as of July 28, though the NBA is slated to resume its season on July 30. Not surprisingly, “MLB was the most popular sport in {DraftKings} sportsbook {last} weekend,” the company told CNBC. Further, last weekend “DraftKings had the second-best day since the March shutdowns began, showing just how important baseball is for the company.”
And based on significant personal experience, the MLB and NFL are among the most popular leagues in fantasy sports as well. As a result, the termination of those leagues’ seasons would greatly harm not only the company’s sports-betting business, but its fantasy-sports business as well.
Two Experts and an MLB Manager Are Bearish
Dr. Anthony Fauci told The Guardian that the high number of coronavirus cases on the Marlins’ roster “could put” the MLB season “in danger.”
Dr. Andrew Morris, professor of infectious diseases at the University of Toronto, said “baseball is in huge trouble.” Dr. Morris added that “anyone who knows what they are talking about would {not} have conceived” the plan that MLB is utilizing to play during the pandemic.
Finally, Dave Martinez, the manager of the Washington Nationals, an MLB team, was quoted as saying, “I’m going to be honest with you: I’m scared.” If Martinez is nervous about the situation, there’s a good chance that many players are also uncomfortable and could easily stop competing if more of their peers test positive for the coronavirus.
The comments by Dr. Fauci and Dr. Morris suggest that the number of coronavirus cases among MLB players could easily surge. Meanwhile, Martinez’s statement indicates that a very high number of MLB players could very well leave their teams if the number of coronavirus cases in the league do jump. And if that scenario plays out, the MLB’s season would likely be cancelled, causing DraftKings’ results and DraftKings stock to fall sharply.
Bubbles Are Not Perfect
Some pundits have suggested that the decision by the NBA to isolate players from the outside world in a “bubble” during their season will prevent the players from contracting coronavirus. But it seems improbable the league would be able to prevent hundreds of players from leaving their hotel rooms when they aren’t playing.
Indeed, despite the restrictions in place, NBA player Lou Williams recently broke the bubble. While Williams’s breach was detected and he will be in quarantine for ten days, other, less egregious violations may very well go undiscovered. So it’s incorrect to assume that the current precautions will prevent coronavirus outbreaks in the NBA. As a result, an outbreak of the virus among NBA players could still very well derail the league’s season, badly hurting DraftKings stock in the process.
The Bottom Line
DraftKings is trading at a very high forward price-sales valuation of about 26, despite the fact its business could take a huge hit due to the collapse of the popular professional sports leagues this year. If the leagues’ seasons do get torpedoed, DraftKings stock will tumble. As a result, investing in the shares is a risky bet that I would not make.
As of this writing, the author did not own any of the aforementioned stocks.
