Friday the 13th is generally seen as a bad omen, but it couldn’t have been better for investors in DraftKings (NASDAQ:DKNG). The online sports book reported stellar earnings that reflect the growing movement towards legalized sports betting.
However some of the company’s report has to be taken with a grain of salt. DraftKings was a pandemic loser when live sports shut down. So it stands to reason that the company would post stellar numbers in the first full quarter with live sports back.
Does this mean it’s all systems go for DraftKings? I think the stock holds a lot of promise, but if there’s one thing that 2020 is teaching us is that few things are a sure thing. And that’s why you may want to hedge any bet you’re making on DraftKings.
A Volatile Year Is Coming to An End
When I wrote about DraftKings back in July, I was concerned about the stock’s valuation as it was trading around $40 a share.
That was then. I suppose I could be forgiven for my cautious outlook. At that time, the prospect of live sports returning was being met with cautious optimism at best. Let’s just say there wasn’t a lot of action on the affirmative side of that bet.
Since then, the stock has been on a wild ride. DraftKings went soaring to above $60 per share. But after the company announced a stock offering to raise $1 billion, the stock was hammered. However, part of the reason the company was raising the money is because it is following the mantra that you have to spend money to make money. And right now, acquiring customers is an expensive proposition.
In fact, in the three months ending Sept. 30, DraftKings was spending approximately 1.5x its revenue on sales and marketing. For now, investors will be willing to overlook that since the company is still in its relative infancy. However, if the company continues to dilute shareholder value, particularly if there is not a corresponding bump in revenue, analysts may have a different story to tell.
Nonetheless, by Nov. 1, DraftKings was trading right about where it was when I wrote about it back in July. But the return of live sports has made the stock’s $40-ish price now seem like a bargain.
Americans Want Some Action
Several InvestorPlace contributors have written about the significance of election night. Ballot initiatives in several states are expanding the legalization of sports betting throughout the country. However, I thought about DraftKings for another reason on that night.
While watching the election coverage, DraftKings was airing commercials encouraging gamblers to place their bets on the overall outcome or even the outcome within certain states.
And that reminds me that DraftKings is about more than sports betting. Users are finding out that if you can bet on it, DraftKings gives you a way to do that. That shouldn’t really surprise anyone who follows sports betting. The prop bets for the Super Bowl probably get as much, if not more, action than the game itself.
But even within the game itself, the granularity of betting is becoming a revenue stream. It’s not enough to simply gamble on the outcome of the game. You can gamble on certain outcomes throughout the game.
DraftKings Stock May Be in For a Rough Spring
With a few exceptions, it has been all systems go for professional and college sports. That means that for the rest of 2020 and perhaps through the Super Bowl, the National Football League should be enough for DraftKings to generate strong revenue.
However, that could be changing. College basketball is set to resume on Nov. 25. But the larger question is not whether it will start, but if it will finish. While President Donald Trump asserts there will be no shutdowns “on his watch” several states are already beginning to impose lockdown measures. At this time, that doesn’t mean live sports will go dark again, but it also doesn’t mean they won’t.
That’s not a bet I’d care to be on the wrong side of. Analysts are bullish on the stock, but that may be factoring in a best-case (or at least not worst case) scenario. All of this is to say that 2021 may be every bit as challenging for DraftKings as 2020 was.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.