3 Reasons To Wait Out Headwinds Before You Buy DraftKings Stock

From a bird’s-eye view, DraftKings (NASDAQ:DKNG) is a name that you’ll want to own for the long haul. With sports returning back to the forefront after the novel coronavirus initially disrupted major professional leagues, DKNG stock has clear upside ahead, and a growing consumer base to boot.

DraftKings (DKNG) logo, magnified, on its app.
Source: Lori Butcher/Shutterstock.com

According to data from The Business Research Company, the global online gambling market reached a size of just under $59 billion. However, it predicts this sector to hit $92.9 billion by the end of 2023. That’s hardly an unreasonable forecast, given that millennials and Generation Z alike have demonstrated a willingness to put their money toward speculative ventures.

Primarily, when the pandemic forced everyone to shelter in place, millions of employees working from home were left with nothing to do. That created fertile ground for day trading the markets, resulting in huge volume spikes relative to pre-pandemic years. And we’d be remiss not to mention the role popular investment apps like Robinhood played in confirming that if you facilitate speculation, new investors — despite their inexperience — will listen.

That’s why investors ought to keep a close eye on DraftKings stock, even if they’re not ready to pull the trigger yet. With its engaging, user-friendly interface and attractive content, DKNG will not have problems securing customers.

Still, that doesn’t mean you should buy DraftKings stock at any price. As we saw with volatility during the second half of October, DKNG is struggling to find a reasonable valuation. I like the company as part of a long-term strategy, but prospective buyers should probably wait for a better entry point. Here are three reasons why.

Massive Infection Spike Clouds Nearer-Term Picture for DraftKings Stock

When new daily Covid-19 cases starting declining noticeably from the summer peaks into early September, this was a very encouraging development for professional sports. With the NFL season hanging in the balance, the reduction in cases implied that with certain mitigation protocols, we could have some semblance of normal.

Unfortunately, what’s not so encouraging is that since early September, Covid cases have been rising. The acceleration ramped up around mid-October, right in line with political candidates running their final campaign outreach efforts. Worryingly, cases just kept rising, with the daily count on Nov. 6 almost reaching 133,000 cases.

While it’s too early to say whether the infection spike will impact DraftKings stock, it’s not out of the question. We could see games getting cancelled or teams losing star players for pivotal match-ups, resulting in headwinds for user engagement and retention.

Economic Concerns May Come Back to Pressure DKNG

For those believing in a relatively quick rebound from the pandemic, recent labor force data gave bulls some confidence. In the final week of October, weekly initial claims for jobless benefits fell to a seasonally adjusted 751,000. Since the Covid-19 crisis first seriously impacted the U.S., this was the lowest reported weekly number.

However, as Wall Street Journal points out, the tally is still well above pre-pandemic numbers. Further, this many consecutive weeks of horribly elevated jobless claims are unprecedented in modern U.S. history. Back during the Great Recession, claims spiked up but fell rapidly from their peak. Now, workers are filing for unemployment benefits at an uncomfortably high threshold.

At the very least, soaring Covid-19 cases will likely have a negative impact on small businesses as health experts push for a more aggressive control and containment measure. Given the uncertainty of this still-raging crisis, this may put a damper on consumer sentiment. That would be bad news for DraftKings stock.

Sports Viewership at a Low

Fundamentally, pent-up demand should have lifted sports viewership following the initial disruption by the coronavirus. During the early days of the pandemic, millions abandoned traditional linear TV subscriptions in favor of streaming entertainment platforms. With no live events, there was no point for maintaining expensive subscription services.

But now that sports have returned, the idea was that fans would ravenously consume content. From information compiled by a Washington Post article, 92% of “sports fans are tuning in more often and for longer durations this year compared with last, apparently turning the condensed sports calendar into a quarantine coping mechanism.”

So what’s the problem? There are just too many premium sporting events occurring all at once. And that means cannibalization across the sports spectrum. With Covid-19 seemingly out of control, it’s possible that the 2021 schedule could suffer some disruption, which may negatively affect DraftKings stock.

Of course, none of the above reasons should dissuade you from DKNG as a long-term play. However, the nearer-term headwinds should make shares more attractive price-wise.

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

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.


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