As shares pull back, should you dive into DraftKings (NASDAQ:DKNG)? It’s easy to make the argument that DraftKings stock moved too far, too fast. But in today’s market, where “growth at any price” has been a winning investment strategy, it hasn’t been wise to bet against “too hot to touch” names like this emerging sports betting giant.
Yet, there’s good reason why shares could struggle going forward. Granted, this is one of the few pure-play sports betting stocks out there for U.S. retail investors. And, with legalized sports betting expected to expand across the country in the next decade, this first-mover is the perfect vehicle to wager on this trend.
However, here’s why DraftKings could disappoint. Firstly, high competition. Not only from long-time rivals like FanDuel (OTCMKTS:PDYPY) and William Hill (OTCMKTS:WIMHF). But also, many U.S.-based casino companies are moving fast into sports betting.
Penn National (NASDAQ:PENN), another gaming “hot stock,” could gain massive sportsbook market share thanks to its partnership with Barstool Sports. MGM Resorts (NYSE:MGM) could also gain significant market share via its sports betting partnership.
Secondly, the stock’s high valuation means it’s more than “priced for perfection.” If the novel coronavirus continues to impact the world of sports, it’s hard to see this company meeting expectations in the coming quarters. In short, shares could easily move lower over the next six to twelve months.
With this in mind, consider shares to be a “wait-and-see” situation.
DraftKings Stock and Sportsbook Competition
Valuation may be a major concern. But, the competitive landscape is what should be top of mind with DraftKings stock. As InvestorPlace’s Mark Hake discussed Jul 15, the company faces high competition among many players vying for a piece of the action.
At first, sportsbook-only operators like FanDuel and William Hill were DraftKings’ main competition. But now, the casino operators are getting into the game with full force. Penn National has big potential to capture market share via its Barstool partnership. And now, MGM’s joint venture with GVC Holdings, Roar Digital (operators of the betMGM app) could also snap up much of the market.
What does this mean for Draftkings stock? Today’s valuation implies a much larger market share than the company will wind up having. This may not matter right now, as this stock is the most accessible pure-play sports betting stock out there for U.S. investors.
Yet, as results come in over the coming quarters, DraftKings could fall short of these priced-in expectations. Add in the risks that the coronavirus continues to impact live sports, and there’s good reason why you shouldn’t buy on today’s pullback.
Will Pent-Up Demand Save The Day?
Is professional sports coming back after its coronavirus hiatus? So far, this appears to be the case. And, based on remarks from Morgan Stanley gaming analyst Thomas Allen, this could mean a sports betting boom is just around the corner.
But, there’s no guarantee that pent-up demand will parlay into record handle for DraftKings and its peers. With the 2020 college football season likely to be conference-only at best, this fall’s sportsbook handle could be smaller than anticipated.
Also, sports betting stocks today have priced in that these tentative seasons will go off without a hitch. If the “bubbles” fail to prevent coronavirus outbreaks, leagues could go on hiatus yet again.
Another MLB, NBA, or NHL hiatus could mean the NFL delays, or even cancels, their fall season. With professional football the most popular sport by betting handle, this could have a material near-term impact on DraftKings’ results. Even if it’s a short-term hiccup, this news could send shares to much lower levels than where they trade today (around $36 per share).
Bottom Line: Take A ‘Wait-and-See’ Approach with DraftKings Stock
There’s no denying the major long-term opportunity with sports wagering. As states from coast-to-coast legalize sportsbooks and betting apps, this company could win big. Even with high competition.
Yet, shares today are “priced-for-perfection,” in two ways. Firstly, today’s valuation assumes Draftkings will have a much larger market share than they’ll likely wind up having. Secondly, today’s share price assumes upcoming professional sports seasons will go off without a hitch. Even as there’s a risk the coronavirus could still affect live sports play.
So, what’s the call? Wait for football season to resume before buying DraftKings stock. If the NBA and NHL seasons go off without issues, it’s likely smooth sailing for pro football. Even if shares move higher between now and then, there’s plenty left on the table long-term, and with less uncertainty than where things stand today.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.