With the Big Ten and Pac-12 postponing fall football, investors are starting to worry that DraftKings (NASDAQ:DKNG) won’t have anything to bet on this fall. With such a noticeable headwind, you would think DraftKings stock would be cratering.
But it’s not. Here’s why.
DraftKings Stock Is Down but Not Out
On Aug. 14, DKNG stock slipped almost 6%. While there were some troubles during the second quarter, DraftKings reported a generally favorable result. I’m chalking up this decline in its share price to a “buy on rumor, sell on news” kind of deal.
As I said in the beginning, investors are getting worried that there won’t be any sports for people to bet on if the football leagues keep postponing games until 2021. There’s a kernel of truth to this idea. However, let’s not forget that baseball, soccer, hockey, golf, and basketball are all running right now.
“The Action Network, a sports betting-focused media company, had its biggest week ever for golf and NHL picks last week, and its second-biggest week ever for the NBA,” Axios contributor Kendall Baker wrote Aug. 12.
Baker points out that sports betting is currently legal in 23 states if you include the four who’ve passed bills but have yet to implement fully. Another nine states have bills in motion. Further, he reminds his readers that states previously lukewarm on the idea, are jumping on the bandwagon because in-person gambling looks ready to take a reduced role in overall future revenues.
“For most major stakeholders in the U.S., sports betting was always a 2023 or 2024 story,” Baker quotes Chris Grove, partner at Eilers & Krejcik Gaming. “So the industry appears to be shrugging off any concern about the long-term impact of COVID-19.”
And why not? Eventually, sports and life will get back to normal. By then, sports betting will be legal in a whole bunch of additional states, putting DraftKings in the driver’s seat.
DraftKings stock might take it on the chin for the next seven to 10 days. Ultimately, despite facing the same sort of headwinds as airline stocks, it’s not in nearly as much trouble in the near term.
DraftKings Has Plenty of Cash
Company management says that without sports, it’s burning $15to $20 million a month in cash. Meanwhile, the airlines, which face a much steeper hill to climb, are burning between $5 million and $59 million — a day!
At the high end of the daily burn rate is American Airlines (NASDAQ:AAL), which is burning $1.8 billion. Meanwhile, relative to its burn rate, DraftKings is sitting on a ton of cash.
“This is relative to their $1.1 billion cash balance we estimate for the end of June, indicating an over 4.5 years sports hiatus before having to raise capital,” Rosenblatt Securities analyst Bernie McTernan wrote recently. “Assuming the potential hiatus would only be temporary, we do not believe it would impact the long term opportunity for OSB [online sports betting] in the US, meaning DKNG would still be in the early innings of a potential $18 billion market opportunity.”
It’s safe to say that one of the major airlines will go bankrupt long before DraftKings runs out of cash. For this reason, you’ve got to be crazy to choose one of the airline stocks over DKNG.
McTernan also believes because the states are starving for revenue, the rest of them will fall in line much faster than they would have pre-Covid.
“There is momentum in the business with OSB and iGaming both surging,” McTernan said. “Sports betting revenue was 30%-plus year-over-year in NJ in June despite the difficult sports calendar comparison while iGaming revenue up 123%-plus year-over-year.”
Forget the short-term implications of no football, there’s plenty to keep sports betters busy, which is why McTernan has a buy rating and a $60 target price.
The Bottom Line
My InvestorPlace colleague, Josh Enomoto, recently called DraftKings stock an excellent short-term trade. He’s bearish long term because of the impending second wave of Covid-19.
While I get his rationale, I’m someone who focuses three to five years down the road, and what its business is going to look like at that time. Josh calls DKNG a “high-conviction buy” for a short-term trade. I consider it a high-conviction buy for the long term.
That said, if you can pick up some stock in the $20s on a correction, I would consider doing so.
If DraftKings fails long term, it won’t be because legal sports betting never took off. It will be because it was unable to execute its plan.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
