DraftKings (NASDAQ:DKNG) was one of the first special purpose acquisition companies (SPACs) to hit it big in 2020. DKNG stock quintupled from the initial $10 offering price. It’s managed that even despite going public at a challenging time as the novel coronavirus wrecked live sports for most of the year.
Now, with professional leagues running again, DraftKings is enjoying record revenue, and the outlook is improving by the month. That said, some folks are cautious given the company’s large operating losses. However, for now, momentum still favors further gains.
DKNG stock’s bullish case stands out because the data on all fronts confirms the upward trend. DraftKings is enjoying strong growth, a great sporting line-up and rapid legalization of sports betting in additional states. So you have a good present story, an enticing catalyst for the next couple of quarters and a runway for growth beyond 2021 as well. Let’s dig into each of these.
Great Revenue Growth
DraftKings’ recent Q3 earnings report was a major turning point in the company’s story. As recently as Q2, DraftKings was still reporting negative year-over-year revenue growth primarily due to the lack of live sports. In Q3, however, revenue soared 42% versus the same period of 2019, even with some sporting events still canceled or delayed. Wall Street analysts, for what’s it worth, had only forecast 31% growth.
Bears will argue that DraftKings’ revenue growth is meaningless in a vacuum because it is running larger losses as it scales up. And that’s a fair point. In a world where there was limited access to capital, DraftKings would be running the risk of spending through its funds before hitting profitability.
But that’s not where we’re at right now. The market is wide open for growth companies, and sports betting is one of the fastest-moving industries. DraftKings can easily fund its spending on marketing by issuing more stock. While dilution is generally a negative, in this case, it’s imperative that DraftKings seize as much market share as possible now. This is likely to be a winner-take-all market or at minimum one with a dominant leader and significantly smaller second place firm.
Sports Are Gaining Momentum
A crucial point in the positive outlook now is that the sports recovery is gaining further steam. The professional sports leagues have largely managed to continue their seasons with only modest interruptions. The National Football League, for example, had players get sick and postponeed a few games. But on the whole, the league has operated better than anyone could have reasonably expected. And in college football, things are going well enough that teams that initially postponed their seasons decided to jump back into the 2020-21 mix.
Other sports such as college basketball – and its key betting highlight March Madness – are up and running again as well. You’ve got the previously postponed 2020 Japan Olympics back on track for next year, and they’re being billed as the symbolic end of the pandemic. Throw in the Super Bowl on top of all that, and you’ve got a stacked lineup of all-star sporting events to get peoples’ competitive juices flowing. With all the pent-up demand for live activities after this cooped-up year, DraftKings could have a truly historic opportunity in 2021.
Additional States Are Coming Online
Up until recently, just a small portion of the American population had access to legal online sports gaming. As of March 2020, DraftKings operated in states that constituted just 12% of the total U.S. population. However, with big states such as Illinois and New York in the pipeline, that was set to rise sharply. DraftKings noted that 36% of the country already had legalized gaming. More specifically, 24% of Americans could do so online as of this past spring.
With the 2020 election, more states are set to join the party. Louisiana, Maryland and South Dakota approved online sports betting, and Nebraska loosened regulations which may eventually lead to online gaming. Now, particularly with the current economic crisis, states are looking around for sources of tax revenue. DraftKings can help with that.
DKNG Stock Verdict
At some point, DraftKings will need to worry about profitability. In Q3, for example, DraftKings spent more than $200 million on sales and marketing in order to generate $133 million of revenue. That’s obviously not ideal. All in all, it lost $348 million for Q3 alone, which is indeed a large figure. This stuff will eventually matter.
For now though, this is a case where the sterling bullish catalysts more than outweigh the risk factors for DKNG stock. I get why some folks are skeptical, and DraftKings has underperformed some other tech stocks in recent weeks. But with the slew of big sporting events coming up, and the likely blowout Q4 earnings that are coming, the path of least resistance is to the upside for DKNG stock.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
