Wait for the Next Big Pullback to Dive into Draftkings

As 2021 unfolds, opportunity is still fully in motion for DraftKings (NASDAQ:DKNG). What do I mean? With major states like New York working fast to legalize mobile sports wagering, the coming year could be another banner one for DKNG stock.

DraftKings (DKNG) logo, magnified, on its app.
Source: Lori Butcher/Shutterstock.com

In fact, many big-ticket states already had legal sportsbooks by the end of 2020. But, with New York and other major states like California and Texas possibly coming online this year, this growth train has very little that could stop it.

That said, there are some concerns for those looking at a position in Draftkings. Currently, it’s trading above $50 per share. At lower prices, blockbuster growth was already largely priced into shares. So, you can imagine how frothy the stock is now, changing hands at around 25 times estimated 2021 sales.

Also, there’s potential for investor disappointment in the coming months when it comes to legalization. This could affect DKNG stock in the near-term.

Yet, while these concerns are on the table, don’t take that to mean that I’m bearish on the overall emerging megatrend here. It’s just that, at today’s prices, I would be cautious and wait for a move lower before entering a long-term position.

DKNG Stock and the “Roaring 20s” for Sports Wagering

The novel coronavirus may have been the big hiccup of early 2020. However, with sports largely back in action, it’ll be a different story in 2021. Plus, on top of the return of sports driving this betting trend, several markets are set to come online in the coming year.

Put it all together and it’s easy to imagine DKNG stock will meet (or exceed) analyst estimates. As I wrote previously, revenue is set to surge 53% in the coming year. And that’s based on consensus of around $845 million in 2021 sales. If growth is greater than expected, based on high estimates, sales could top $1.1 billion over the next twelve months.

And this is only the start. Just like in other emerging industries, we could see a “Roaring 20s” for the sports wagering space. By the start of the next decade, online sportsbooks and iGaming could be a $33.7 billion per year business, based on analyst projections.

What’s Draftkings’ piece of the pie? Per the same projections, this company could see revenues grow to $4.3 billion by 2030. What’s more, the company could be generating $1.5 billion in annual EBITDA. But, despite this promising pathway to high profitability, don’t rush out and buy it today.

Why? The current growth premium for DKNG stock looks a bit stretched right now. Add in the potential for near-term disappointment and sitting on the sidelines may be the best move for now.

Draftkings Is Too Hot to Touch Right Now

The 2030 projections for DKNG stock may sound appealing. However, you should compare those estimates against the stock’s current market capitalization. Valued at around $21 billion in today’s market, it’s obvious that investors already assume these projections are a near certainty. So, with little room for error, it won’t take much to fuel a big temporary move lower.

In fact, there is something on the table that could scare off investors in the coming months. I’m talking about the possibility that new markets will wind up being less lucrative than projected.

As Barron’s reported on Jan. 7, Governor Andrew Cuomo of New York isn’t pushing for legal sportsbooks to help out DKNG stock. Instead, he’s trying to shore up the state’s finances, which are still shaky from pandemic-driven economic challenges.

This means that New York will either tax net sportsbook revenues onerously (like Pennsylvania does) or choose to operate mobile sports betting via its state lottery. Either of these moves would limit opportunity for Draftkings and its competitors.

Admittedly, New York is just one of many large jurisdictions. However, we could see other states go with a similar approach to legalization. So, there’s enough on the horizon to potentially spook investors in the near-term and push the stock back to prior price levels.

Wait for The Next Big Pullback

While I have my concerns about Draftkings shares at today’s prices, I’m far from bearish on its long-term prospects. Throughout the 2020s, the U.S. will see a continued rapid expansion of the online gambling market. As such, it’s early movers stand to gain the most.

But, even with blockbuster growth in mind, DKNG stock is too pricey at around $53 per share. So, instead of buying now, wait for the next big pullback to enter into a position with this name.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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