DraftKings (NASDAQ:DKNG) stock was all the hype on Wall Street after the online sports gambling company went public back in April. Listed through a blank-check, special-purpose acquisition company (SPAC), DraftKings stock doubled from about $20 to over $40 in just a few weeks.
Ever since, the stock has come under pressure, though, bouncing around in the $30 range and ultimately going nowhere over the past few months.
Don’t stress this recent weakness in DKNG stock. This is a long-term winner that is simply taking a breather after a meteoric run higher. Let the stock consolidate. Buy on dips. And hold for the long haul.
The Online Sports Gambling Megatrend
Online sports gambling is a megatrend which represents one of the market’s best investment opportunities over the next five to 10 years.
The big picture here is pretty simple: Consumers love to gamble. Global gambling revenues measured about $450 billion in 2019. All of that gambling demand is shifting to the online channel, with share of total gambling revenues transacted digitally rising from 9.5% in 2015 to 12.2% in 2019.
Concurrently, legislation is pivoting everywhere to legalize online sports betting and online gambling. Some 14 states have legalized online sports betting to-date, representing ~24% of the U.S. population. Both of those numbers have been growing at an exponential rate every since the U.S. Supreme Court overturned the federal ban on sports betting in May 2018.
Connecting the dots, the future here is as clear as day.
The online sports betting and gambling markets are just starting to come into their own, and over the next decade, they will grow exponentially as things like daily fantasy sports (DFS) become ubiquitous among gamblers and sports fans alike.
Investing now in DraftKings stock is investing early in this disruptive megatrend.
DraftKings is Emerging as a Leader
With over 12 million registered accounts and over 500,00 monthly unique players, DraftKings has emerged as the leader in the online DFS, online sports betting and online gambling categories.
Importantly, the company has competitive advantages in place which will sustain this leadership for the foreseeable future.
First, there’s the brand. When you think of DFS or online sports betting, you think of DraftKings or FanDuel. Those two brands dominate mind-share in this category. As such, if you’re thinking about partaking in DFS, chances are high you will either use DraftKings or FanDuel to do so simply because they are the only two platforms you know.
Second, there are the network effects. DFS is inherently social. You want to do it with your friends, or a community of sports fans. DraftKings has the largest such community in the world. Plus, a few of your friends are probably on the platform, too. To that extent, DraftKings offers the best social DFS experience out there.
Third, there’s the prize money. Because DraftKings is the biggest online sports betting and DFS platform on the planet, the company has the most resources to create large prize money pools. The bigger the prize money pool, the more gamblers the platform will attract.
Fourth, there’s the data. DraftKings has robust and granular gambling habit data on 12 million registered accounts. That’s more than nearly anyone else in this space. DraftKings is leveraging that data to drive effective marketing and well-received platform iterations. Together, these data-driven efforts simply extend DraftKings’ leadership position.
Finally, there’s the single-wallet feature. DraftKings has multiple platforms. Across multiple states. And multiple sports. All consumers need to do is enter their payment info once, on one of those apps, in one of those states, for one of those sports, in order to seamlessly jump anywhere in the ecosystem. This single-wallet unification makes for a much more seamless and convenient user experience.
DraftKings Stock has Big Long-Term Upside Potential
One big knock against DraftKings stock is valuation. With $12 billion market capitalization and revenue of just $71 million last quarter, those numbers make it easy to chalk up DraftKings stock as being overvalued.
But it’s not. You don’t value a next-gen growth stock by looking at last quarter’s revenue numbers. You value it by looking at the growth potential over the next 10 years. And when you do that, it becomes clear that DraftKings stock has huge upside potential.
The addressable market for online sports betting and online gaming in the U.S. is roughly $40 billion. Thanks to favorable legislative changes, improving accessibility and rising consumer demand, the market will grow to full capacity within the next five years.
DraftKings is the number one player in that market. Double-digit market share is likely at scale. Even at just 10% market share, you’re talking $4 billion in revenue.
Management’s illustrative financials imply operating margins north of 30% at scale. Assuming so, I think DraftKings is a company which has visibility to $1 billion+ in profits one day.
Casino and gambling stocks tend to trade around 20-times forward earnings. Based on that multiple, then DraftKings is a $20 billion company in the making. At $12 billion, DraftKings stock still has big long-term upside potential.
So don’t stress near-term weakness in DKNG stock.
Instead, embrace it. Buy the dips. And hold for the long haul.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.