In Europe, a bet is known as a “flutter,” and gambling on sporting events, even from a mobile app, is common. But the U.S. Supreme Court’s 2018 decision allowing each state to control sports betting, removing the exclusivity of New Jersey and Nevada casinos, means the whole business is becoming Americanized. And as such, DraftKings (NASDAQ:DKNG), which began as an online home for fantasy sports leagues, is leaping into the new world. But what does this mean for DKNG stock?
Wall Street is taking its own flutter on it. At its Jan. 6 opening price of about $50 per share, DKNG has a market capitalization of $18.6 billion on expected 2020 revenue of just $450 million.
There are good reasons to expect bigger things in 2021. But is it enough to bid the stock to 38 times revenue? That’s where the sporting blood comes up.
DKNG Stock at a Glance
DraftKings went public last April through a Special Purpose Acquisition Company (SPAC). It had launched its sports betting service in 2018 and now operates it in six states. It also has deals to run sports books in some small casinos.
Its hole card, however, is a deal with Walt Disney’s (NYSE:DIS) ESPN, making it the network’s fantasy-sports provider. (Caesars Entertainment [NASDAQ:CZR] will run the sports book through William Hill, a British bookie it bought for $3.7 billion in September.) DraftKings also has an affiliation deal with AT&T’s (NYSE:T) Turner Broadcasting.
The idea is that DraftKings now has low customer-acquisition costs, and a huge, cheap marketing platform, with which to dominate the space. Rosenblatt Securities has made it a “top pick” for 2021. It believes state budget deficits, which exploded during the Covid-19 pandemic, will lead to quick legalization. New York is expected to legalize sports betting for just that reason. Other states may follow.
The Big Risks
Right now, sports betting is a patchwork of laws. Some states are wide open, others are shut tight, and still others allow action in casinos but don’t want it online.
The biggest risk for DraftKings is competition. The industry’s biggest player is Flutter Entertainment (OTCMKTS:PDYPY), which began with European books Paddy Power and Betfair. It also owns Fanduel, a sports fantasy site DKNG once tried to merge with, before being stopped by anti-trust regulators. Flutter has more than twice DraftKings’s market cap, at $36.7 billion.
Then there’s Bally’s (NASDAQ:BALY). This is the former Twin River Holdings, which bought its name from Caesars (which started 2020 as Eldorado). It has a deal with Sinclair Broadcasting (NASDAQ:SBGI), which bought Fox’s regional sports networks and has stuck the Bally’s name on them.
These big players are now trolling the sports business, signing deals with teams and casinos. The bulls say we’re developing a clone of the English system, where soccer clubs wear casino names on their shirts and signboards post odds.
The Bottom Line
There is reason to believe that online sports betting, and sports betting generally, is ready to take off.
InvestorPlace‘s own Tezcan Gecgil says you should always buy DraftKings when it drifts below $45 per share, which is just a little below where it is now. Ian Bezek also likes the name. So does David Moadel.
I won’t argue with them. Valuation and competition are both major concerns. But I know enough sports nuts to know that there’s a ready market for what DraftKings is selling.
The house is always a better bet than any team. If you’re young and looking for action, this looks like a good speculation. Wait for lockup selling to subside before placing your bet.
On the date of publication, Dana Blankenhorn held a position in T.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/. As of this writing he owned shares in T.