Since lockdowns have lightened up and most U.S. states have struggled to reopen in limited ways, some clear market winners have emerged, and several trends seem likely to continue. Online entertainment and gaming stocks have climbed steadily since April — unsurprising even as stay-at-home orders lift. Sports-betting powerhouse DraftKings (NASDAQ:DKNG) has “outperformed the market considerably,” notes TipRanks, despite the fact there have hardly been any sports to speak of. And the success of DraftKings stock has especially shaken things up.
DraftKings currently markets itself as “the leader in daily fantasy sports,” a sure draw with so many people stuck at home. It also features online casino games and an impressive mobile betting app called Sportsbook.
From its inception, this company has been something of an oddity. Rather than a traditional IPO, DraftKings went public in April under a special purpose acquisition company (SPAC), creating a market for the stock, which initially traded around $15 per share. Since then, it has risen as high as the mid-$40s and now hovers around $36. Online gambling is generally a hot market, and DraftKings has been on fire. It may also be a risky bet.
Reasons for Skepticism
DraftKings stock price quadrupled after a March low near $11, soaring to a high in early June over $44 before dropping by 20%. On June 23, the company sold 46 million additional shares. Most of those shares came from insiders who cashed out their holdings as the stock price more than doubled, raising some possible red flags with analysts.
If you want other reasons for skepticism, or for selling the stock, consider the current reality that DraftKings has not turned a profit. The company raised the cash for its recent capital investment from stock sales. But “the fact that insiders sold an additional 30 million shares,” Luis Sanches writes, “can be interpreted as the insiders viewing the valuation as rich.”
DraftKings’ Longterm Potential
DKNG’s bumpy descent in June has made some investors wary. InvestorPlace’s David Moadel recommends a “look but don’t touch” approach. Others, however, see bullish potential for DraftKings, in particular and online gambling in general.
Rosenblatt analyst Bernie McTernan, for example, advises investors to look past the current turbulence. “As the gambling industry in the U.S. is emerging,” says McTernan, “we believe online players will take the dominant share and DKNG should be a leader.”
Likewise, Seeking Alpha’s Venki Iyer sees “strong future growth opportunities as the legalization of sports gaming continues across the U.S.” Currently, online gambling is legal in 22 states and Washington, D.C., with several others likely to follow suit in the near future.
The story of DraftKings is one of an industry emerging from its infancy, experiencing the usual growing pains. But the evidence supports McTernan and Iyer’s optimism. Online gambling accounted for 12% of total industry revenue in 2019. However, in New Jersey, which McTernan sees as “emblematic” of the industry’s future, 90% of gambling revenue came from online betting.
Should You Buy?
TipRanks rates DKNG as a strong buy for its long-term odds, but in the short term, investors may wish to be cautious. For DraftKings stock, a lot will ride on the near-term future of major league sports. Given the continued spread of the coronavirus, there’s no telling whether, for example, the planned NBA season will actually restart on July 30, as planned, or if it will be interrupted soon after if players begin testing positive for Covid-19.
On balance, DKNG seems like a toss-up. Closer scrutiny of the company’s financials might help wary investors decide if they’re comfortable anteing in.
As of this writing, Jody Bennett did not hold a position in any of the aforementioned securities.