DraftKings (NASDAQ:DKNG) is perfectly positioned to take advantage of the move to online gaming. DraftKings stock should see more highs along the way.
Traditional brick-and-mortar companies are having a hard time of it in the current climate. Many investors are shifting their focus to tech companies, especially those geared towards the “new normal.”
That’s why it should come as no surprise DraftKings stock is enjoying a strong bull run since the company went public through a reverse merger with blank-check company Diamond Eagle Acquisition Corp. in April.
The move sent DKNG stock into orbit, but enthusiasm has since tapered off a bit, with shares falling almost 18% in the past month. That’s understandable since the company relies heavily on the return of professional sports.
Reports already indicate a second wave of the novel coronavirus could potentially be upon us. States are issuing new social distancing guidelines as reopenings have led to a spike in cases. It’s unlikely we’ll see NBA, NHL, and more importantly, the NFL, resume full-fledged operations soon.
But DraftKings is sitting on a market worth between $18 billion and $23 billion by its estimates, a fact no savvy investor can ignore.
Ultimately, shares of the sports betting company will gain ground as more people start to gamble online. Despite states reopening, people remain queasy regarding visiting crowded areas, weighing down casino stocks and the ilk. That’s where the long term growth story for this stock lies.
Legalization and DraftKings Stock
In 2018, the United States Supreme Court found the Professional and Amateur Sports Protection Act (PASPA) to be unconstitutional.
The landmark verdict paved the way for several states to legalize gambling, and up until this point, 24 states have legalized sports betting in one shape or form. Meanwhile, several states are working their way towards legalization — a positive tailwind for the sports gaming company.
The only downside to this is that we don’t know the exact timelines of when individual states will legalize betting.
When you look at the revenue breakdown for the company by geography, Asia and Europe are by far the most significant contributors. And unless a large number of states move towards legalization soon, the composition is unlikely to change anytime soon.
Run of Play
In the first quarter, the company reported a wider-than-expected net loss of $74 million, or 22 cents per share, even though revenue gained 30% year on year, to finish at $89 million.
Concerned investors need not fret since the loss has more to do with an aggressive expansion policy rather than operational issues. The platform operates in five more territories now than it did a year ago. That will inevitably lead to an increase in advertising and marketing spend, reflected in the latest set of financials.
DraftKings has a multi-pronged strategy that involves creating brand awareness through sports television, podcasts, and signing sponsorship deals with top brands.
Naturally, this will lead to high costs, but the company estimates that it will be able to scale back expenses by 67% once a majority of Americans can take part in sports betting activities.
While we are still discussing the earnings report, it’s important to note here that the revenue which grew 101.4% to $43.4 million, will also come down as integration with the SBTech platform is completed.
Resumption of Sports Will Drive DKNG Stock Higher
Although cases are spiking in several U.S. states after reopenings, Major League Baseball and the NBA are starting practice and planning for the upcoming season.
There is a lot of pent up demand waiting to unleash once sports return in full force. We saw a taste of it with UFC 249, one of the rare sports events conducted amid the pandemic.
Even though major box-office draws like Conor McGregor were missing from action, the event still did over one million PPV buys and was the highest bet UFC event in history, according to DraftKings Director of Communications, Stephen Miraglia.
Sports leagues can’t afford to stay dormant for a lot longer, and many will resume operations in Q3, or take substantial steps to get back on track by Q4. It won’t be easy — a total of 25 NBA players have tested positive for COVID-19 thus far. But sports operations need to reopen slowly. Otherwise, they will have to sustain substantial losses.
Final Word on DraftKings Stock
DraftKings is in a unique position, holding an approximately 90% stake in the sports betting industry alongside competitor FanDuel. The recent negative earnings report is not something to fret over; the sector is growing, and DraftKings is doing the right thing by raising awareness regarding its platform.
Moving forward, spending on marketing will decrease while revenues will rise. A short term risk is a potential delay in the resumption of sports events, considering the spike in recent cases. However, there’s no indication at this time that the recent cases will lead to a stoppage.
DKNG stock is a strong buy.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.