Shares of sports betting company DraftKings (NASDAQ:DKNG) are down 17% this month. Its recent secondary offering of 32 million shares, and fears of Covid-19 related disruptions on sports are to blame for the tumble of DraftKings stock.
With its third-quarter results looming, investors are concerned about the global pandemic’s impact on the company revenues. Guidance so far suggests that revenue is roughly $15 million lower than expected. Despite the short-term hiccups, the company should finish off the year strong, making DraftKings stock a fascinating play.
Sports viewership and ratings are down significantly, despite the assumption of the pent-up demand for sports when they resumed. The hotly contested political climate in the U.S. doesn’t help either, with news networks witnessing a massive surge in viewership.
Even with the challenges, though, DraftKings’ bets have grown 460% year-over-year in the third quarter. Such numbers are a testament to the company’s integrated platform resulting in healthy margins for DraftKings in the long term.
Earnings Preview
DraftKings is set to report its third-quarter results on Nov. 13, providing an earnings snapshot with its recent stock prospectus. Overall, the operational environment in 2020 has proven highly volatile amidst the uncertainty surrounding the virus.
However, sports are back and have helped bolster activity on its platform. Bets placed on the platform grew by 110% in New Jersey alone.
But there is a word of caution, according to the filing:
“The unique sports calendar, with overlapping seasons for all four major U.S. sports during a portion of the three months ended September 30, 2020, has also favorably impacted our handle in a manner that may not be representative of our performance in other periods.”
Despite the surge in activity, the company is expecting a $15 million shortfall in revenues. The major hit in revenues is because of lower “hold” percentage from the NFL during the third quarter. “Hold” describes the profitability percentage for a bookmaker on a specific bet. The cancellations and postponements in the NFL have had a lot to do with what the company calls “atypical” hold rates on NFL games.
Revenues should reach approximately $131 million to $133 million for the quarter, matching analyst estimates. Additionally, the company also believes that it will crack the 1 million player mark in the quarter.
The Sky’s the Limit
DraftKings is currently the leader in online fantasy sports games and has cemented its presence as an industry juggernaut. There are several reasons to believe that the company will become more prominent with time, riding multiple tailwinds in the sector. With the online sports gambling market expected to exceed $127 billion in revenues by 2027, DraftKings investors should be licking their lips.
The company’s platform has something for everyone. Though the four major sports leagues in the U.S. drive most of its revenues, it continues to add more sports on its platform. Its proprietary technology platform offers a unique player-friendly service currently unmatched in the sector.
Additionally, it has direct agreements with some of the most influential names in sports. It recently signed partnership agreements with ESPN, Turner Sports and the PGA, showcasing its dominant presence in the sports betting field.
The company has an excellent opportunity to capitalize on the growing legalization of sports betting across the U.S. It is spending extensively on marketing to increase its brand equity across the country. Estimates suggest that the company will generate over $1 billion in sales, growing at 44% through 2022.
Final Word on DraftKings Stock
Third-quarter earnings for DraftKings were weighed down by pandemic but are still impressive considering the circumstances. The company’s unmatched platform provides a unique user experience that will continue to drive growth for the long term.
With sports returning in full flow next year, expect DraftKings stock to reach new heights. Its stock price of $42 is currently well below its mean price target of $58.70. Therefore, now is a great time to grab the stock at a massive bargain.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
