DraftKings (NYSE:DKNG) has been on fire of late, trading slightly below its all-time high. Interestingly, DKNG stock is one of the few growth stocks that sidestepped the nasty decline in growth and tech names.
While mega-cap tech stocks have been in a multi-month slumber, growth stocks were screaming higher. That is, until mid-February, when the entire group began showing signs of waning momentum.
In just a few short weeks, growth stocks suffered a big correction. Individual stocks fell anywhere from 30% to 50% as higher interest rates were blamed as the culprit.
Yet DKNG stock was nowhere to be found among the casualties. This company rode a wave of momentum into March, with solid earnings, March Madness and strong prospects keeping its stock out of the “sell pile.”
We like this name for the long term — although we wish it had gotten caught up in the selloff so investors could buy more.
The second half of calendar year (CY) Q1 and virtually all of CY Q2 should act as a massive catalyst for DraftKings.
During the same time periods last year, the sports world — the entire world — was turned completely upside down. The novel coronavirus had dealt a disturbing disruption through everyone’s lives and sports leagues around the world weren’t able to sidestep that impact.
March Madness was cancelled, while the NBA and NHL playoffs were delayed. The start of the MLB season was pushed back, then shortened. Tennis, golf and virtually every other sport or tournament was delayed or cancelled.
We could write an entire whitepaper on how many industries and businesses were disrupted by this altered sports universe alone. For DKNG stock though, we’ll just stick to one: Gaming.
With all of these delays and cancellations, sports gambling ground to a halt. There was nothing to bet on, save for some e-sports and other events. But the real money-makers were off the table.
The silver lining here was that DraftKings could keep its cash burn to a minimum and didn’t face any sort of real liquidity issues. Fast forward to 2021 and now the company faces a monumental opportunity with all of these events back on.
The next three to four months should be a robust period for DraftKings and investors know it.
Breaking Down DraftKings
Those short-term catalysts mean DraftKings is in for a robust comparable period ahead of it over the next several quarters.
However, the long-term catalysts should help fuel some of the short-term catalysts in DKNG stock as well. The biggest long-term catalyst is legalization.
In 2018, the Supreme Court struck down a 1992 federal law that essentially banned commercial sports betting in most states. Finally — sports gambling without flying to Las Vegas. What a silly arrangement anyway, particularly with all the offshore betting sites and other, less secure ways to place wagers.
Some even estimated that $150 billion worth of illegal wagers were placed each year in the U.S. Talk about a tangible addressable market for DraftKings.
Circling back to the short- and long-term catalysts, during 2020 we saw more states legalize sports gambling. So not only will there be more sporting events in the next few months than in 2020, but more states will have access to bet on those events as well.
Those same states — Michigan, Tennessee and Virginia come to mind — will now also be able to bet on the NCAA, NBA, NHL and NFL in CY Q3 and Q4. For DraftKings, these states missed the traditional start of these leagues in 2020.
And more legalization is on the way too.
As states are looking for more ways to generate tax revenue, sports gambling will be one of the more immediate ways to tap into those dollars. The trend has been accelerating and should continue through this decade. As more states join the list, the market will continue to expand. These are the long-term drivers for DraftKings.
Bottom Line on DKNG Stock
When DraftKings reported earnings in February, revenue of $322 million beat expectations by roughly $90 million. That’s a tremendous beat, but it was the guidance that really got bulls excited.
Management raised its FY 2021 outlook from a range of $750 million to $850 million, to a new range of $900 million to $1 billion. Importantly, while that new figure includes recently added states (like Michigan and Virginia), it doesn’t include states that could legalize during the year.
So it’s possible that this range is conservative. The company added:
“DraftKings is now live with mobile sports betting in 12 states, which is more than any other company in the industry. These 12 states together represent 25% of the U.S. population, a position that DraftKings has achieved less than three years after the Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992.”
Clearly there’s momentum in its business and clearly, that momentum is present on the charts as well. When the rest of the high-growth stocks were getting hit, it wasn’t as if DKNG stock was totaly unfazed. DKNG stock also saw volatility — just not the type of losses that many of its peers had.
Shares continued to hold the $56 area, as well as the 10-week and 50-day moving averages (despite some intraday weakness below these measures). For trend followers, dips to these measures are buying opportunities.
For longer term investors, let’s consider buying the dips into the mid-$50s. Should the stock see $56.75 again, it will represent a decline of roughly 24% from the highs. That’s a pullback we’ll want to buy.
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.
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