After a sideways couple of months, DraftKings (NASDAQ:DKNG) finally resolved to the upside. DraftKings stock has been a difficult one for traders to pin down, because it’s been a bit of a bumpy ride.
The stock was full of false breakouts and breakdowns, seemingly finding its footing at the last second while, at the same time, losing its balance just when it looked like it was ready to launch higher.
However, it’s starting to look good for the bulls. DradtKings stock hit a new 52-week high of $64.51. That came on Friday Feb. 5, the last trading day before the Super Bowl.
Digging Deeper on DraftKings Stock
A rally into the Super Bowl isn’t all that surprising and it wouldn’t be a shocker to see shares dip from current levels after such a big run. However, to call DraftKings a sell seems to be a bit premature.
Think about all of the sporting events that were missed in Q1 and Q2 of 2020 last year.
There was no March Madness tournament, baseball was delayed until the summer, the NBA and NHL seasons were cut short and the college basketball season ended early. There are more sports of course, but when it comes to betting in the spring, those are the major ones.
As we meander through 2021, it seems clear that sports leagues seem likely to forge ahead this year. That should create a huge comparable-growth period for DraftKings and other sportsbooks as they bring in far more money than they did a year ago.
For 2021, analysts expect $866 million in sales. If achieved, that will represent almost 60% growth year over year. In 2022, they forecast $1.25 billion in sales.
Is DKNG stock expensive based on these numbers? Yes, trading at roughly 28 times 2021 revenue estimates. However, investors who are buying today aren’t doing so because of the Super Bowl or March Madness.
They’re buying in anticipation of this company doing several billion in annual sales. They’re buying in the anticipation that legalization continues and DraftKings dominates an emerging market.
States Upon States
Even if there were sports being played a year ago, some of the recently added states weren’t available until recently. Michigan and Virginia have populations of ~10 million and 8.5 million, respectively, and both launched online sports betting in January. Tennessee went live in November with its 6.8 million residents.
Those are the 10th, 12th and 16th largest states in the U.S. by population, respectively.
Further, Washington, Oregon, Montana, Arkansas, Missouri, North Carolina, Delaware and Rhode Island have all approved sports betting, but in limited or non-mobile fashion. These states are low-hanging fruit.
New York has legalized sports betting too, but does not yet support mobile betting. NY is the fourth-largest state in the U.S. If it legalizes mobile betting, DraftKings has a massive opportunity. Texas could be coming soon. Missouri is looking to legalize too.
Why are states suddenly jumping on the bandwagon?
First, a Supreme Court ruling effectively gave them the green light to pursue sports gambling. Second, tax revenue is always attractive to the states. But that has become especially true in 2020 and 2021, as local economies are left reeling from the novel coronavirus.
I expect the push toward legalization to continue, thus giving DraftKings a secular growth theme to follow.
Trading DKNG Stock
In October, DKNG stock underwent a sharp and painful correction. From the month’s high to the month’s low, shares shed 45%. There was no specific day of pain, just a long, drawn-out pullback that punished dip-buyers.
Eventually, though, shares found their footing. After rallying off $35, the stock bounced between $45 and $55 for a while, and $56 continued to act as resistance while DraftKings was putting in a series of higher lows.
Finally, we got a breakout over $56, with DKNG stock quickly rallying to new all-time highs just over $64. Now we’re getting a sell-the-news reaction after the Super Bowl.
I wouldn’t hate seeing a retest of $56 to see if this former resistance level holds as support. If the stock goes on to make new highs, look for a push beyond $70. Above that puts $75 in play, followed potentially by the 161.8% extension near $82.
On the date of publication, Bret Kenwell held a long position in DKNG.