Buy the Dip in DraftKings Stock at $40

DraftKings (NASDAQ:DKNG) stock has been one of the hottest stocks all year long, as it has becoming increasingly clear to Mr. Market that the gambling and sports betting industry will increasingly shift online over the next decade.

DraftKings (DKNG) logo on a phone
Source: Lori Butcher / Shutterstock.com

DraftKings — as the largest player in the online sports betting and Daily Fantasy Sports world — has become the market’s favorite play on this “online casino” megatrend.

From its Nasdaq listing in late April, DKNG stock proceeded to more that triple into early October.

This optimism is not misplaced. Sports betting and gambling are digitizing, and in the sports vertical of the online casino world, DraftKings is and will remain the unrivaled king. Long-term, DraftKings stock is only going way higher.

With that big picture in mind, recent weakness in DKNG stock — shares have dropped more than 30% over the past two weeks — is nothing more than a buying opportunity. Indeed, DraftKings stock looks like a compelling buy around the $40 level.

Here’s why.

DraftKings Is King of Online Sports Betting

Long term, DraftKings stock is a winner that belongs in every growth investor’s portfolio — and it’s really not that hard to see why.

The huge and growing $450 billion global gambling industry is in the early stages of being digitized, mostly because we live in an era where if it can be digitized without meaningfully detracting from the core experience, it will be — and sports betting, slots and casino games, of course, fall into that wheelhouse, since those activities are easy to digitize.

The share of total gambling revenues transacted digitally rose from 9.5% in 2015 to 12.2% in 2019. Thanks to shifting legislation (14 states having legalized online sports betting to-date), shifting demand (consumers are warming up to the idea of gambling online), and shifting supply (Covid-19 casino shutdowns have forced casino operators to more aggressively expand online gambling platforms), the “online casino” megatrend will meaningfully accelerate in the 2020s.

As they do, we will enter a new world wherein online sports betting, iGaming and Daily Fantasy Sports are legal and commonplace across the entire country.

DraftKings is and will remain a leader in this new industry, because the platform has huge and enduring competitive advantages, including:

  • Branding. To consumers, DraftKings is top-of-mind when it comes to thinking about online sports betting and DFS platforms, and therefore, consumers interested in playing will most likely start their journeys on the DraftKings platform.
  • 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, and therefore, offers the best social DFS experience out there.
  • 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.
  • Size. 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.
  • Convenience. 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.

Connecting the dots, the future here is crystal clear. DraftKings will one day emerge as the unrivaled sports segment leader in the e-casino industry, a position which ultimately means DKNG stock is a long-term winner.

Business Momentum Remains Robust

Despite recent weakness in DKNG stock, DraftKings’ core business has actually gained tremendous momentum in recent months.

Specifically, through various headline partnerships and megadeals since the summer, DraftKings has only further cemented its leadership position in the emerging online sports betting and DFS categories. During that stretch, DraftKings has:

In other words, DraftKings is signing exclusive sportsbook and DFS deal, after exclusive sportsbook and DFS deal, with various sports leagues, organizations and media platforms.

So long as DraftKings keep signing these deals at a healthy cadence, then the platform will remain on a trajectory to reach industry-wide ubiquity within the next few years.

And, so long as that remains true, DKNG stock will be a strong buy on a big dips.

DraftKings Stock Has Dropped Into Undervalued Territory

To be sure, valuation always matters, and DKNG stock was overvalued in early October up above $60.

But, down at $40, the stock is now appropriately undervalued relative to the company’s long-term growth opportunity.

My modeling makes some simple assumptions, including:

  • The global gambling industry continues to grow at a ~2% annualized pace for the next 15 years.
  • Digital penetration of the gambling industry continues to grow by ~200 basis points per year to over 40% by 2035.
  • DraftKings controls about 4% of that market at scale, assuming huge share in the sports betting segment and tiny share in the slots and casino segments.
  • Revenues rise to over $10 billion by 2035, while net profits scale to around $2.5 billion (or ~$6.70 per share).

Casino and gambling stocks tend to trade around 20x forward earnings. Based on that multiple, DKNG stock is on a glide path towards $130+ prices in the 2030s. Discounted back by 8.5% per year, that implies a 2020 price target for DKNG stock in the lower $40s.

So, with the DKNG stock price today rapidly closing in on $40, shares are starting to look attractive from a fundamental valuation perspective.

Technical Support at $40

DraftKings stock is also looking attractive on this dip from a technical perspective.

The stock’s 100-day moving average presently sits around $40. This will be the first major technical support the sell-off will face.

Given the bullish backdrop for the online casino megatrend as well as the vigorous macroeconomic rebound going on right now — and all the momentum that the DraftKings business has today — it seems likely that DKNG stock will hold at this key technical support level.

As such, it appears the worst of the DKNG stock sell-off is over, and that shares will bottom and reverse course around the $40 level.

Bottom Line on DKNG Stock

DraftKings stock is a long-term winner that got too hot for its own good. Now, the stock is reasonably pulling back. This pullback is an opportunity. Look to buy the dip in DKNG stock around $40, since that is where the stock starts to look fundamentally and technically attractive.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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