The Second Wave Is Taking Its Toll on DraftKings

It’s not every day that a gambling website makes a case for being an environmental, social and governance (ESG) play. But that’s what happened recently when DraftKings (NASDAQ:DKNG) stepped up to the plate to address a hotly contested call during a football game between Penn State and Indiana. And it might have impacted trading sentiment for DraftKings stock on the following Oct. 26 session.

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

Here’s how Sports Illustrated described the play:

The Hoosiers won 36-35 in overtime, scoring on a two-point conversion when quarterback Michael Penix Jr. dove toward the goal line. Pictures of the play from various angles made it look like the ball hit out of bounds before crossing the goal line.

Other pictures showed the point of the ball breaking the plane of the goal line before hitting out of bounds. Because it was called a score on the field, there wasn’t enough evidence to overturn the call.

Stunningly, DraftKings seems to want to cure the wrong itself.

According to SI, a DraftKings spokesperson told the magazine, “We are refunding ML (money line) bets on Penn State from yesterday. Bettors should see the money in their accounts at some point on Sunday.” On a morality angle, DKNG stock scored quite highly among fans. However, stakeholders were apparently less than impressed.

On Monday, shares closed down more than 7%, continuing a steep bearish trend that’s been in place since earlier this month. It also draws questions about whether DraftKings stock got ahead of itself. However, the refund bit probably only played a small part in the volatility.

As you can tell from the competition, the week got off to an ugly start. Penn National Gaming (NASDAQ:PENN) also took a hit on Monday, as did Landcadia Holdings II (NASDAQ:LCA). Both companies have also charted bearish trend channels since late September/early October.

Unfortunately, what ails DraftKings stock is the same headwind that has hurt gambling stocks in general: the awful novel coronavirus.

Another Wave May Sack DraftKings Stock

After just recovering from this summer’s peak Covid-19 cases, we’re having a bit of déjà vu again. It’s not quite the same scenario because it’s actually worse. On Oct. 23 and 24, new daily coronavirus cases exceeded the 80,000 mark for the first time, according to data from the Centers for Disease Control and Prevention.

If that wasn’t bad enough for DraftKings stock, coronavirus-related hospitalizations are also on the rise. That presents a serious concern that in this second wave – many in the media are now classifying the summer spike as the second wave, making this the third – a rash of hospitalizations could result in devastating health outcomes.

To be fair, professional sports leagues have handled (in my opinion) the pandemic very well, all things considered. Nevertheless, Covid-19 has imposed its presence on the field. As the Associated Press reported, the NFL’s Tennessee Titans suffered a coronavirus outbreak, as have other key players. Yet cynically, the league will go on because professional football is a multi-billion-dollar industry.

So, why is DraftKings stock and its ilk seeing so much red ink lately? In my view, Wall Street has a dim view on the U.S. government’s ability to contain this virus. As White House Chief of Staff Mark Meadows told CNN’s Jake Tapper, the Trump administration is focused on pushing out vaccines and therapeutics.

But in a strange moment, Meadows stated that “We’re not going to control the pandemic. We are going to control the fact that we get vaccines, therapeutics and other mitigations.” To arguably most Americans, that sounds like a tacit admission that not only has the White House lost control of the pandemic, it has acquiesced to this harsh reality.

DKNG stock vs. New daily coronavirus cases
Click to Enlarge
Source: Chart by Josh Enomoto

Now, it doesn’t really matter what my personal interpretation is but rather, what Wall Street thinks. Clearly, investors didn’t like this response from Meadows. And that bodes poorly for collegiate and professional sports for the winter season, which of course is net negative for DraftKings stock.

As well, DraftKings has demonstrated an inverse relationship with Covid-19 cases: as infections rise, DKNG has had a tendency in recent months to decline in value. Therefore, the latest surge in coronavirus cases couldn’t have come at a worse time.

A Compelling Long-Term Discount

But because DraftKings stock has tumbled badly from its earlier peak, there is a case to be made that shares present a viable discount, provided that you’re patient enough to ride out nearer-term volatility. Specifically, Macquarie Capital’s Chad Beynon, a gaming and leisure sector analyst, noted that the DraftKings brand has a tremendous pull with the sports gambling crowd. In an email to me, Beynon wrote:

We believe that the $500 million of respective TV marketing dollars spent by DraftKings and FanDuel during the last five years helped created well-known and well-trusted Sports brands that the U.S. consumers strongly ties to sports betting. … Regarding Barstool, we think it’s an incredibly well known and well followed brand, but at this point, it has less connection with actually sports betting, but more about an entertainment, comedic culture that revolves around sports amongst other verticals. During the last few months, it has shifted towards curating more sports betting product around their personalities, which will certainly help the message.

Essentially, once we get over the pandemic, DraftKings is in a strong position to dominate the sports betting market. Further, having watched some of DraftKings’ content myself, the company focuses on the action on the field and stays away from controversial off-field topics that have characterized certain competing platforms.

But knowing when the crisis will fade is the hard part. Therefore, I’d take a measured approach if you’re bullish, buying some shares in this weakness but keeping the powder keg dry for potentially cheaper prices down the road.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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