Investors in DraftKings (NASDAQ:DKNG) are discovering that investing in the online sports betting sector is a gamble in and of itself. Since going public, DKNG stock weathered the pandemic with an absence of live sports for customers to bet on.
That allowed a range of competitors to get their online betting games in shape. And now the company has to contend with a scathing report from Hindenburg Research that is suggesting the company is engaged in illicit activity.
Still, DKNG stock is up 31% in the last 12 months. That puts it in the same ballpark as the S&P 500, which is up 37% in that same period. The big question for investors is whether now is the time to bet on the company. If you’re a risk-tolerant investor, I believe it is.
Let’s take a closer look.
A Shocking Allegation
As I’ve come to understand from the InvestorPlace writers, DraftKings has been accused of being a front for organized crime. Upon hearing that I must admit I think I was laughing for five minutes. The phrase, “I’m shocked, shocked to find that gambling is going on in here” came to mind.
I’m not excusing the allegations. If they are found to be true it will have disastrous effects for any shareholder. But the idea that the world of illegal and illicit gambling can seamlessly merge is, perhaps, naive.
However, what is also naive is expecting that Hindenburg Research, the firm that has made the assertions, does not have a dog in the fight. Will Ashworth points out that a convincing accusation of mob rule will be a convincing way to sell its short hypothesis.
Ashworth also makes a compelling argument using actual math that shows why investors have little to worry about from a revenue standpoint. Needless to say, I’m going to leave this allegation alone until it’s debunked or proven to have more substance. Besides there was another allegation in the report that, while less salacious, is very sobering.
It’s Costing a Lot to Get Customers In the Door
As almost an afterthought in the company’s report, was this statement:
We spoke with several industry experts and competitors who questioned the viability of DraftKings’ model of aggressively burning cash on promotion and marketing to acquire customers in the near term, despite a lack of evidence of long-term customer brand loyalty.
Now that’s something I can get behind. The pandemic couldn’t have come at a worse time for DraftKings. The company had just gone public in late 2019. However, rather than having a clear field to attract customers, the pandemic shut down live sports.
In the meantime, other companies, such as MGM Entertainment (NYSE:MGM) were able to get products in the market. And as Larry Ramer points out, the company is the top sports betting company in only three states in a recent three-month period.
This just illustrates that online sports betting is a highly competitive industry even while in its infancy. And if DraftKings can’t find a way to make their service “sticky,” the stock will look less appealing.
Christmas is Coming For DKNG Stock
Are you ready for some football? DraftKings certainly is. According to the website legalsportsbetting.com, “an estimated $100 billion is wagered at licensed sportsbooks during the NFL season.” And college football, while not generating as much as that is not far behind.
And although it is not the exclusive sports betting partner of the National Football League, it is one of only three partners to hold this designation. This allows DraftKings to “leverage NFL marks within the sports betting category and activate around retail and online sports betting.” The other two partners are Caesars Entertainment (NASDAQ:CZR) and FanDuel.
This might not have the same significance as Black Friday does in retail circles. But before investors dismiss DKNG stock, they would be wise to wait to see how DraftKings performs in a full, and hopefully not Covid-interrupted, season.
But I need to state again, I’m not dismissing the Hindenburg report out of hand. I’ll simply point out that only one analyst has ventured an opinion since the report broke. That would be Oppenheimer and the firm gave DKNG stock a buy rating with an $80 price target.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.