With the kickoff of the 2020 NFL football season, is it time to dive into DraftKings (NASDAQ:DKNG)? Sure, the novel coronavirus pandemic and the hiatus of sports earlier this year didn’t little to damper interest in DraftKings stock. But now, as we enter sports betting’s “busy season,” which runs from football season through college basketball’s “March Madness,” it’s game time for the sportsbook operator.
Yet, with a limited college football schedule this year, there are less games for the wagering public to bet on. The NBA may be back, but all bets are off whether college basketball returns in November.
But the size of the sports wagering menu is just one factor. A more important one is the risk of competition. As more players enter the space, it may be tough for DraftKings to live up to expectations. Add in a rich valuation, and there’s plenty on the horizon that could send the stock lower.
That being said, the positive impact of pro football’s return may be enough to hold shares steady for now. In short, this isn’t a screaming buy, but don’t go bearish just yet.
The Impact of Barstool’s Launch on DraftKings Stock
A limited sports wagering menu due to the pandemic may be a near-term risk factor. But competition remains the larger concern now and in the long term.
I’m mainly talking about Penn National (NASDAQ:PENN), and its upcoming Barstool Sports wagering platform. Granted, DraftKings does have first-mover advantage on its side. Yet, what this company lacks is its own Dave Portnoy. The Barstool impresario, who has become more famous than ever thanks to his foray into day trading, has helped drive more attention to Barstool.
It remains to be seen whether Portnoy’s legion of fans in both the sports and investing communities will mean big success for Penn’s Barstool platform. Yet, this isn’t the only major competitive threat out there for DraftKings.
First, you have the company’s longtime rival, FanDuel (OTCMKTS:PDYPY). Both companies got their start in the daily fantasy sports space, before the 2018 Supreme Court decision that opened the door to legal sportsbooks from coast-to-coast.
Second, you have apps from casino companies. Besides Penn’s offering, you have MGM’s (NYSE:MGM) BetMGM app as well.
Third, the scores of global bookmaking companies that have entered the U.S. market. This includes William Hill (OTCMKTS:WIMHY) and PointsBet (OTCMKTS:PBTHF).
What’s the impact of such a wide competitive field? In a recent client note, Jefferies’ David Katz wrote that the heavy competition could impact near-term profitability. In Katz’s view, current earnings estimates are too high, given the increasing costs of entering states that have just legalized sports betting, like Michigan.
As a result, the company may not hit profitability until 2023. Yet, these concerns haven’t turned Katz into a bear. The analyst continues to have a “buy” rating on the stock, with a $55 per share price target.
Valuation Remains A Concern
As InvestorPlace’s William White reported Sept. 2, the company has brought on pro basketball legend Michael Jordan as a special advisor to the company’s board. Details weren’t released, but Jordan will receive an equity interest.
Sure, this made for a great headline and it put some points into DraftKings stock. But will it move the needle going forward? That’s debatable. Oppenheimer’s Jed Kelly couldn’t figure out the financial impact of this deal, but thought it was a positive for the company’s brand image.
The stock hasn’t pulled back since the deal announcement, but chalk that up mainly to the return of pro football. Simply put, this development won’t do much to propel this stock.
What could have more of an impact is valuation. As mentioned above, it’s going to be years before DraftKings scales to profitability. But, right now, shares trade at an enterprise value-sales ratio of 38.9.
Granted, as this industry rapidly grows, a premium valuation is warranted. But what happens if Barstool lives up to its hype, and limits DraftKings’ growth potential? What if rising marketing costs extend the company’s timeline to profitability?
Given shares are “priced to perfection,” the stock could head lower if the company falls short of expectations.
Richly Priced, But Don’t Bet Against It
With many risks on the horizon, there’s plenty that could sink this popular sports betting play. Whether it’s the launch of Barstool’s betting app, or other factors, it won’t take much to make investors fall out of love with this “story stock.”
Don’t bet against DraftKings stock today. The return of pro football, and the positive news it could produce for the company, is likely enough to keep shares steady for now.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
