DraftKings Stock Will be a Volatile Play Until Sports Return

Since making its trading debut in April at an opening price of $20.49, DraftKings (NASDAQ:DKNG) stock is up about 60%. On June 2, DraftKings stock saw an all-time high of $44.79, and now it’s hovering at $33.

DraftKings logo on a phone
Source: Lori Butcher / Shutterstock.com

The company was set up in 2012 as a daily fantasy sports platform. Metrics from the Fantasy Sports & Gaming Association show that there are well over 60 million fantasy sports players in the U.S. and Canada.

In the U.S., DraftKings and FanDuel, which is part of the UK-based Flutter Entertainment (OTC:PDYPY), are the two main platforms for sports and sports fantasy betting.

In recent days, volatility has inched up on Wall Street. Market participants are wondering if the stock may restart its bull run or whether they should ring the cash register to take some of their paper profits. The run-up in the share price can in fact continue in the rest of the year.

DraftKings Stock at a Glance

DraftKings went public in late April via a special-purpose acquisition company (SPAC), instead of conventional IPO. It merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded, and SBTech.

SPACs are so-called “blank check” publicly traded firms. They have either no or limited operating assets. In a SPAC, an entity raises public funds for the sole purpose of acquiring a private company.

Therefore, by merging with a SPAC, a company can avoid going through as many hurdles to go public or sell new shares. InvestorPlace readers may remember that Virgin Galactic (NYSE:SPCE) and Nikola Motor Company (NASDAQ:NKLA) have also gone public through a SPAC transaction.

Diamond Eagle listed in 2019 at $10 a share. In Dec. 2019, it announced that it would merge with DraftKings. Then Diamond Eagle changed its name to DraftKings. It also changed its ticker. In a matter of months, Diamond Eagle shares moved as high as $18.69. Boston-based DraftKings stock was officially listed on the New York Stock Exchange on April 24.

DraftKings Stock May Benefit from Long-Term Catalysts

As it turns out, 2018 was an important year for the evolution of DraftKings’ business model. In May 2018, the U.S. Supreme Court struck down the Professional Amateur Sports Protection Act (PASPA), the federal law that had essentially limited sports betting to a number of states, i.e. Delaware, Montana, Nevada, and Oregon, for the last 25 years. As a result, other states got the green light to establish their own regulated sports betting.

Following the ruling, DraftKings CEO Jason Robins said legalized sports betting would become a big industry. Fantasy game providers have more options to allow gambling, as people can gamble on the outcome of games or point totals.

Recent research concludes that between 2020-2024, the U.S. fantasy sports market is expected to grow by $9.34 billion at a compound annual growth rate (CAGR) of 10%. Similarly, the U.S. sports betting market is expected to hit $5.7 billion by 2024.

Those investors who want to capitalize on the potential of sports betting as well as the growth in fantasy sports in the U.S. may want to consider doing further due diligence on DraftKings stock.

DraftKings Stock May Face Short-Term Headwinds

The Street initially debated the timing of going public in the midst of the global pandemic. After all, there have been no live sports to bet on for some time now. Yet DraftKings stocks doubled in a matter of weeks.

In case profit-taking hits broader markets, DraftKings stock may also be adversely affected. The company’s growth projections rely on an increasing number of people betting on sporting events. But until sports resume, there cannot be much revenue for the group. DraftKings also needs to be licensed in more states across the country.

In mid-May, the group released its first quarterly statement. Revenue increased 30% on a year-over-year basis. However, it also reported a net loss more than twice as high as a year ago. The next earnings result expected in mid-August may not necessarily show much improvements.

However, if the company cannot generate revenue to justify the current valuation levels, then investors could easily hit the “sell” button.

The Bottom Line

It is not yet definite when sports will fully be back in our lives. Until then DraftKings stock is likely to be highly volatile with a potential downward bias.

If you’re considering investing in DraftKings stock now, you may want to see how the next several quarterly reports will come out. With a newly listed company, it is important to see the trend in its fundamental metrics.

Such a wait may also be important if our economy does not pick up as fast as initially priced in by the equity markets. Growth companies like DraftKings tend to burn through cash extremely fast. In case the company does not generate enough revenues, it may easily run into a financial headache.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/draftkings-stock-will-be-a-volatile-play-until-sports-return/.

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