As legalized sports betting continues to gain traction, so too does DraftKings (NASDAQ:DKNG). Investors are hoping that DKNG stock goes from a big SPAC play in 2020 to a big winner in 2021 and beyond.
Will it? On the plus side, the trend appears to be DraftKings’ friend.
Mostly known for its daily fantasy sports platform, the company has made a huge push into the sports betting world. That’s as a number of states continue to legalize various forms of online gambling, including sports gambling.
Since the Supreme Court ruling in May 2018 that struck down a federal law that “effectively banned commercial sports betting in most states,” it has now given a catalyst for states to go after the “estimated $150 billion in illegal wagers on professional and amateur sports that Americans make every year.”
That’s a big tangible addressable market (TAM) and one that every serious business in the industry will go after. It’s also what makes DraftKings such an interesting longer term play.
The Big Picture
DraftKings came public at a really interesting time, debuting on April 24 of 2020 via a SPAC offering. It was one of the big-name offerings that really kicked off the SPAC race.
In any regard, DraftKings came public at a time where major sports were at a standstill. Professional leagues were not playing, while large events like March Madness were cancelled.
Yet the stock caught fire in May, more than doubling from the close on April 24 to the high in early June. It’s been a bit of a mixed bag since, with the stock going on a series of declines and rallies. Can the move to the upside last?
The biggest risk remains the novel coronavirus. Lockdowns and suspending sports play would put a massive dent in DraftKings’ business model. At least in the short term.
However, the country seems to have rejected that concept. While states may be willing to shutter bars and restrict restaurants, it seems to be unlikely that American sports will be taken away. Plus, the NBA and NHL have proven that a “bubble” approaches seem to work, creating a bit of a win-win in tough times.
Because Q1 and Q2 2020 were slow when it comes to sports activity, it means DKNG stock could be setting up for a monstrous couple of quarters in the first half of 2021. Think about the comps. March Madness in 2021 when there was no March Madness in the prior year. The NHL, NBA and NCAA basketball leagues played severely altered schedules. The MLB delayed the start of its season, then played a shortened one.
Some states have online sports gambling operations coming online soon. Some will be in time for these events and potentially others like the Super Bowl. It’s one reason analysts expect 53% revenue growth in 2021 to $845 million.
Breaking Down DKNG Stock
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The catalysts here are pretty clear, right? Even in a coronavirus-filled world, sports are being played. States are rushing to legalize sports gambling, not just because the public wants it, but because many are in desperate need of tax revenue.
In the short term, the slate of sports activity has the potential to drive DKNG stock, but the longer-term picture will be states migrating to some form of legalized sports betting. For instance, New York state joining the fray is sure to boost demand. However, in some instances it’s proving to be a slower transition to online sports betting, as we’ve seen in states such as Michigan.
Although I’m bullish on these trends, let’s not pretend DKNG stock is trading at a discount. Shares trading at more than 22 times 2021 revenue estimates. While that may seem fine in our current market environment, 22 times forward sales is rather lofty valuation in most investment environments.
That’s not to say DraftKings should be sold, only that investors need to keep this valuation perspective in mind. It’s also not yet profitable or generating positive operating cash flow. Again, that’s not to say it’s a bad company with poor liquidity — it’s actually a great company with strong liquidity — but the company has to thread the needle here at this valuation.
I would love to get on this train, but do so on a dip. In November shares were changing hands near $35. If we get another dip below $40, that may be our opportunity.
On the date of publication, Matt McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article held a long position in DKNG.
