“The house always wins,” so gambling has always been a great business for the house of course. Otherwise the whole industry would not exist. The pandemic threw a wrench in their profit machines worldwide last year. A few industries emerged winners and Draftkings (NASDAQ:DKNG) belongs to one of them. When people cannot gamble in person, the next best thing is an online alternative. That’s why DKNG stock is up more than 500% in a year.
DraftKings had an unfair advantage but it doesn’t change the current facts. Management has a long runway to build its business. It is likely they will succeed unless they commit a slew of mistakes. That is not my scenario.
Fundamentally, this is not a cheap stock because it has already priced in 50 years of full year sales. That’s a lot of hope for the company to be able to deliver without stents of disappointment. My conclusion today is that this is not an obvious point of entry.
I don’t mean that the stock is not going to be successful in the future. In fact, I wrote about the upside potential in early December and it worked out well. Back then the stock was above $50 per share. I suggested to wait and buy it on a dip closer to $45 and that’s exactly what happened. That trade yielded 65% from low to high.
This is a similar situation that calls for a repeat strategy.
It Pays to Be Patient
I am always willing to wait for better entry points. For a lot of investors, catching a favorable level is not a big deal. For me, it’s a sticking point if I open a trade and immediately goes red. I try to avoid precarious setups at all costs. In this case, I would rather wait for a DKNG stock dip toward $60 per share. It will find buyers there and it will be scary to catch the falling knife. But with patience comes courage because homework gets me ready for the dip opportunities.
The alternative to that would be to trade it on momentum. If DKNG breaks through the all-time high, it would trigger another $5 rally from there. Opportunistic trade strategies are viable as long as the investors know the differences.
So far, management has proven itself competent. They’ve aligned themselves with a lot of great partners. For example, they recently announced a deal with the UFC, which is a rapidly growing sport. It’s not a surprise that the company is reporting and forecasting great growth. With strong results I can totally ignore the fact that they are still losing money.
In fact, analysts who bring profitability as a problem are flat out wrong. You can’t build a huge business by skimping on pennies. Just ask Amazon (NASDAQ:AMZN) and how many critics fought it for a decade before they saw the results.
DKNG Stock Has Help
There are new tailwinds to come, such as the stimulus. Others have more staying power especially from legislation. NY legalization of mobile gambling is on deck to name one. The reopening process will definitely help business. In the U.S. things are seemingly going well. The inoculation process seems orderly and steadfast. This will undoubtedly help bring back sports in a bigger way.
So far, it still doesn’t feel like before. I applaud everyone’s effort to make it look like the olden days but there’s still much work to do.
Luckily, Wall Street looks past current hurdles into future potential. Having an online business is a double-edged sword. The reopening takes away a small advantages. But also if we have a hiccup along the lines of the novel coronavirus situation, there will be disappointments. The media is already covering a potential third wave in France and other European countries. If that’s the case, then it will be a swift kick in the gut for this industry. DKNG stock will also suffer short term in sympathy.
There are good things coming from DraftKings so patient investors will see rewards for years. The thesis for owning it for the long run is very viable. The entry point depends on the investor’s risk tolerances and time frames. When I face dilemmas like these, I use options. There I can get long the stock now but easily leave another 20% room for error. The strategy would be to sell DKNG puts in order to buy the shares lower.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.