In the first eight days of October trading, DraftKings (NASDAQ:DKNG) has declined in value on five occasions. More importantly, for those considering buying DKNG stock, it’s lost 14% of its value.
Momentarily, DraftKings’ stock traded in the $40s. Now that it has fallen to $45, I’d consider taking a big position. Here’s why I feel this way.
DKNG Stock Was a Buy At $37
The last time I wrote about the sports betting platform was Aug. 18. It closed trading that day at $37.21. Despite the October swoon, DKNG is up 37% in the two months since.
In my August article, I argued that it was a buy for the long haul.
“[I]f you can pick up some stock in the $20s on a correction, I would consider doing so,” I wrote.
“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.”
Clearly, a lot of investors feel this way, including Oppenheimer analyst Jed Kelly. The analyst upped his target price on DraftKings Oct. 12 by $10 to $65, providing investors with a potential upside of 27% over the next 12 months. Kelly maintained his “outperform” rating on its stock.
If I told you I could guarantee you a 27% return on an unknown stock over the next 12 months, would you buy it? I sure would even if that unknown stock turned out to be DraftKings.
Kelly suggested that the company’s issue of 16 million shares at $52 was an indication of just how popular its sports betting and iGaming platforms have become.
“We believe the raise strengthens [DraftKing’s] position in growing the legalized US sports-wagering/iGaming markets and are expecting the company to leverage its paid-marketing competencies and be aggressive on [customer acquisition costs],” Kelly stated in his note to clients upping its target price.
He’s not the only analyst who likes DKNG stock. Of the 22 covering DraftKings, 14 have it as a “buy,” eight as a “hold” and none have it worse than that. As for the average target price, it’s $58.37, about where it traded at the end of September.
Three months ago, only 12 analysts were covering its stock. That number has almost doubled, suggesting the interest in DraftKings is through the roof.
Is It a Buy At $51?
In my August article, I argued that DraftKings would benefit from a double dose of good news in the future. First, sports and life would get back to normal. Secondly, more states would jump on the bandwagon to benefit from the taxes generated by sports betting.
So, despite a softening of its share price in the near term, it would benefit greatly from these two tailwinds. Add in the fact it has a bullet-proof balance sheet, and you have the makings of a 10-bagger.
“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,” I wrote.
Now that it’s moved from $37 to $64 and back to $51 over the past two months, the question on many investors’ minds is whether its share price will continue to soften.
DKNG closed in the $40s on only 15 occasions since its merger completion on Apr. 23 – as the winter months approach and a second wave takes out live sports for an extended period.
The Bottom Line
However, long term, I don’t think there’s any question about sports betting in the U.S. becoming a massive industry. Once California, Texas, and Florida jump on board the sports-betting express, the potential for DraftKings is exceptional.
Credit Suisse analyst Benjamin Chaikin thinks California alone could push DKNG to $100.
So, if you plan to own for two to three years, I don’t think you’ll be hurt buying at $51. However, I would consider saving a little cash for the correction to $45. If it were to go into the $30s, I’d back up the truck.
As I’ve said, the only way DraftKings fails to capitalize on its opportunity is if it doesn’t execute its plan. I don’t see that happening.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.