Shareholders in the fantasy sports platform DraftKings (NASDAQ:DKNG) stocks have had a great 2020. Year-to-date (YTD), DKNG stock is up about 370%. But that metric tells only half the story.
Since November, DKNG stock is up about 45%. Buoyed by the positive vaccine news from BioNTech (NASDAQ:BNTX), Pfizer (NYSE:PFE), and Moderna (NASDAQ:MRNA), the Street has been favoring rebound plays. Investors have been putting their capital on companies that are likely to benefit from daily life and the economy going back to pre-Covid-19 days.
However, DraftKings stock is likely to consolidate in the coming weeks as some investors ring the cash register to take profits. Much of the good news on the vaccine front is already factored into the share price. Market participants seem to assume vaccine will be easily distributed and the economy will be back to normal quite soon. But it may still be months before Covid-19 is part of history. The recent job numbers also gave a bleak outlook. Therefore, some profit-taking in DKNG stock is possible. Long-term investors may regard any dip toward the $45 level as a good opportunity to buy into the shares. Here’s why.
Changing Regulatory Scene
According to metrics from Allied Market Research, “The fantasy sports market size was valued at $18.6 billion in 2019, and is expected to reach $48.6 billion by 2027, registering a CAGR of 13.9% from 2021 to 2027.”
Recent research led by Jon Samuel Venne of Worcester Polytechnic Institute highlights, “Fantasy sports is an area that has grown in popularity immensely over the last few decades. With this growth has come the development of many new platforms in the realm of online daily fantasy sports. Chief amongst these new platforms is DraftKings, a company founded in 2012 that champions online fantasy sports contests. On DraftKings, a fixed number of users may pay an entry fee to join a contest and compete for a fixed cash prize, which can be up to $1 million or more.”
Meanwhile, the U.S. sports-betting regulatory scene is fast changing. Some lawmakers and stakeholders who were previously on the fence about online sports betting are now more supportive. Nearly half of the U.S. states have already legalized sports bettings.
The past several months have seen sporting events partially resumed. Sports fans and online players are hopeful, the worst of the virus is behind us.
DraftKings has been a pioneer in daily fantasy sports. Shareholders believe it will become and stay as the leading online sportsbook operator, too.
DKNG Stock’s Quarterly Results Were Robust
On Nov. 13, DraftKings released Q3 results. For the three months ended Sept. 30, 2020, revenue was $133 million, an increase of 98% YoY compared to $67 million. The four major team sports, i.e., baseball, basketball, hockey and football, are boosting to revenues.
GAAP sales and marketing expenses also increased to $203 million. While the company reported a net loss of $347.7 million and an adjusted loss per share of 57 cents, the results were better than the analysts forecasted.
CEO Jason Robins who was pleased with the metrics said, “DraftKings recorded an increase in monthly unique players of 64% to over 1 million.” Management also raised the FY 2020 guidance.
Investors have also approved of the quarterly results, including the robust revenue and user growth. Since mid-November, the DKNG stock is up about 20%.
Yet, as a result of the recent run-up, its P/B and P/S ratios stand at 9.67 and 41.58, respectively. These numbers show an expensive valuation level, even for a growth company like DraftKings. Put another way, there could easily be some consolidation in the weeks to come, especially it misses expectation in quarterly reports.
The Bottom Line
InvestorPlace.com readers will remember that the company became public via a SPAC in April 2020. Then in early October, DKNG stock saw a record high and hit $64.19. Now, it is hovering around $49.
The next move for DraftKing shares could be a battle between long-term investors and short-term traders. Shareholders would like to see DKNG stock reach and stay over $65 and over. Traders are likely to make bets on the headlines around virus and stimulus developments. During December, DraftKing shares will possibly trade in a range between $45 and $55.
Depending on your risk return profile, you could consider investing around $45 and expect to hold DKNG stock for 2-3 years for handsome profits. The digital sports and gaming entertainment platform may well see many years of growth in a booming industry.
Investors who are not ready to commit capital into DKNG stock fully yet could also consider investing in an exchange-traded fund (ETF) that has DKNG as a holding. Examples include the Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK), the Invesco DWA Consumer Cyclicals Momentum ETF (NASDAQ:PEZ), the ProShares Ultra Consumer Services (NYSEARCA:UCC), the Roundhill Sports Betting & iGaming ETF (NYSE:BETZ), or the VanEck Vectors Gaming ETF (NASDAQ:BJK).
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies.