DraftKings (NASDAQ:DKNG) is the prime example of price action reflecting plenty of investor enthusiasm and hope. Since its April 24 IPO, DraftKings stock nearly doubled and that’s the case despite a pullback of almost 27% from its previous high, one the name is still in the midst of.
Here’s why DKNG stock is impressing in less than three months as public company, the pullback notwithstanding.
Its bread and butter are daily fantasy sports (DFS) and sports betting, though online casinos are increasingly important part of the DraftKings investment thesis, too. More on that later.
In a typical year, a sportsbook stock debuting in April would have been treated to the spoils of the early part of the Major League Baseball season as well as the tail ends of the regular seasons for the NBA and NHL with the playoffs for those two leagues coming later in the second quarter. However, 2020 isn’t a normal year in any regard, sports or otherwise, due to the novel coronavirus pandemic.
DraftKings’ IPO arrived several weeks after the NBA and NHL postponed their seasons and as MLB failed to start on time. For awhile, DFS players had nothing to get involved and offerings for sports bettors were confined to obscure fare, such as soccer in small countries, international table tennis (seriously) and Korean baseball.
In its short life as a public company, two things are becoming clear with DraftKings. First, some investors appear comfortable wagering on future prospects that may or may not arrive.
Second, the recent retrenchment in stock indicates it has some vulnerabilities to Covid-19 headlines. Look at the timeline of that pullback. It’s now about five weeks old, a period including an ominous increase in coronavirus cases across the U.S.
All Is Not Lost for DraftKings Stock
DraftKings will soon report second-quarter results, but investors probably shouldn’t put too much weight on those numbers because the April through June stretch of 2020 won’t be comparable to the year-earlier period.
As noted above, a typical second quarter for bettors and sportsbook operators alike would include plenty of MLB, NBA and NHL action as well as the NCAA Tournament Final Four and the Masters golf tournament. That wasn’t the case in 2020.
However, the third quarter could be a proving ground for DraftKings’ quest to lower losses and get on the road to profitability. In the current quarter, MLB is slated to commence its shortened, 60-game regular season while the NBA and NHL are scheduled to conclude the 2019-20 editions of their campaigns.
Focusing on the NBA for a minute because basketball is the second-most wagered on sport in the U.S. after football, there are potential problems.
While the NBA seems intent on forging ahead with its season in the confines of a “bubble” near Disney World in Orlando, players and staff are testing positive for Covid-19 before bubble play even commences. Some players who aren’t testing positive are playing it safe and opting to stay home. Simply put, if the NBA decides to scrap the bubble plan in the name of Covid-19 safety, that’s a lot of lost revenue for DraftKings and its rivals.
Now, let’s discuss football. Data published by UNLV spanning 1984 through 2019 indicate that at Nevada casinos, football, both college and the NFL, was the most wagered on sport every year. Given Americans’ affinity for football, it’s reasonable to expect that as more states permit sports betting, compiling data in the process, the Nevada trend will hold true across other regions.
That’s great for DraftKings and investors…after 2020. This year, the coronavirus is putting college football on thin ice. On July 9, the Big 10 Conference said it’s moving to a 10-game, conference-only slate this year. A standard college football regular season schedule is 12 games, so if other conferences follow suit, there will be far fewer games upon which gamblers can wager.
Reduced games is actually a rosy scenario. Right now, there are simply no guarantees there will even be a 2020 college football season. As for the NFL, which is the king of sports gambling when it comes to total handle, it appears the league will proceed with its 2020 season, but if that outlook changes for the worse, DraftKings stock, along with any other name with sports betting leverage, would almost certainly be punished.
Bottom Line
The details outlined above are a prescription for caution with DraftKings stock, not an obituary. The company’s iGaming (internet casinos) business can augment some of the lost DFS and sports betting revenue under a league(s) cancellation/shutdown scenario.
In fact, online casinos are viewed as significant growth drivers for the gaming industry with revenue estimates ranging from almost $7 billion to as high as $20 billion by 2025. For now, iGaming is confined to a small number of states, but more are expected to come aboard amid the scramble for revenue forced by Covid-19.
For investors that focus on the sports side of the DraftKings business, there are still factors to embrace. Colorado, Illinois and Michigan all joined the ranks of the legal, operational sports betting states during the coronavirus shutdown and each is expected to generate significant sports gambling revenue.
By some estimates, Illinois will become the sports betting hub of the Midwest, if not the entire country. All three states are among those that DraftKings has exposure to.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of DraftKings.
