Buy the Pullback in DraftKings Stock As Sports Betting Accelerates

DraftKings (NASDAQ:DKNG) may have given up all of its gains in recent weeks. But, following recent election results, the bull case for this sports betting play has only gotten stronger.

DraftKings Stock
Source: Lori Butcher/Shutterstock.com

Here’s why.

One of the major catalysts in this company’s court is the inevitable legalization of sports betting in most U.S. states. Right now, quite a few have sportsbooks up and running. But, there are still plenty of population centers that have yet to come online.

Sure, competition is still sky high. Yet, DraftKings is well-positioned to capture a significant share of the market. How so? First mover advantage, and strong brand equity. Both factors give it a good chance to grow its user base as more states join the legalization wave.

Sure, given its massive growth prospects, shares remain richly-priced. Even after the recent weakness. Yet, with the possibility of results vastly exceeding estimates, the coming year could be a banner one for this company.

What Does Legalization News Mean for DraftKings Stock?

On Nov. 3, all eyes may have been on the U.S. Presidential election. But, referendums pertinent to this industry were on the ballot in several states. And, the results are a big positive for this stock, and its peers, going forward.

As InvestorPlace.com’s Ian Bezek discussed Nov. 9, three U.S. states voted to legalize sports wagering. Sure, all of them (Louisiana, Maryland and South Dakota) are at best medium-sized markets. But, these results are a clear sign the legalization wave is alive and well.

According to LegalSportsReport.com, almost 75% of U.S. states have either legalized, or are in the process of legalizing, sportsbooks. Population centers like California, Florida and Texas have yet to allow sportsbook operations. In short, there are still major markets waiting in the wings for DraftKings to capture.

Sure, competition is fierce. And, not just long-time rivals like Flutter Entertainment (owners of FanDuel). Barstool Sports parent Penn National (NASDAQ:PENN) could give it a run for its money. So could land-based casino giants Caesars Entertainment (NASDAQ:CZR) and MGM (NYSE:MGM).

The mad dash to capture market share may mean near-term uncertainty for this stock. Yet, that doesn’t mean it’s time to avoid this richly-priced sports betting play.

Why? Despite the competition, this first-mover has a shot at capturing significant market share. Also, with the possibility of results going forward not only meeting, but exceeding expectations, Mr. Market may have plenty of rationale to push shares back closer to recent highs.

Don’t Let Current Valuation Concerns Give You Regrets Later

Sure, even after its massive selloff in October, shares remain richly priced. At today’s prices (around $41 per share), shares trade for nearly 47 times trailing-twelve-month (TTM) sales.

But, with a growth story like this one, you have to look towards the future, not the present, to assign a valuation. And, while growth stocks can get a bit ahead of themselves, that may not be the case here with DraftKings.

Why? As our own Matt McCall wrote back in October, analysts like Macquarie’s Chad Beynon see revenues soaring to “$4.3 billion by 2030.” Considering how much margins could improve, today’s market capitalization ($15.7 billion) doesn’t seem irrational.

But, I’m sure you’re thinking, why should I pay up for growth that’s years away? This analyst estimate could be understating things. Not only could revenues in 2030 be much higher than the $4.3 billion figure referenced above. Near-term results could come well ahead of current Wall Street projections.

Right now, analyst estimates call for around $773 million in annual revenue by 2021. But, as Gary Alexander of Seeking Alpha recently noted, the massive ramp-up of legal sportsbooks across the U.S. could mean results next year vastly exceed expectations. According to Alexander, “annualized revenues” could top $1.6 billion just one year from now.

Simply put, don’t let today’s high valuation multiple scare you off. Results in the coming year could exceed expectations. That could lead to big regrets for those who miss the boat.

Buy on the Recent Weakness

What’s the next big driver on the horizon for this stock? The company announces quarterly results on Nov. 13. Given these numbers will include the first few weeks of NFL betting, investors will get a snapshot at how well this company is doing, as its total addressable market has expanded in the past year.

Sure, continued pandemic tailwinds could mean disappointing results. But, based on the betting volume numbers coming out of major markets like New Jersey, it doesn’t seem that likely revenue numbers will fall short of expectations.

Even so, the upcoming earnings report doesn’t make or break the bull case for DraftKings in the near-term. With the company well-positioned as sports betting expands, there’s still good reason to buy on the recent weakness.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/buy-the-pullback-in-draftkings-stock-as-sports-betting-accelerates-cseo/.

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