The Rise of Retail Investing Is Dangerous for DraftKings

Thanks to DraftKings (NASDAQ:DKNG), shares of Golden Nugget Online Gaming (NASDAQ:GNOG) went full circle and back again following breaking news that the former is buying the latter. While sentiment obviously went wild for GNOG shares, the narrative for DKNG stock is much less clear.

DraftKings (DKNG) logo on a phone

Source: Lori Butcher / Shutterstock.com

First, let’s discuss the major announcement. According to CNN Business, DraftKings declared on Monday that it would be buying Golden Nugget — a rival in the online casino space — for $1.56 billion. GNOG veritably skyrocketed, with shares closing up 50% against the prior session. Tilman Fertitta, the billionaire owner of the Houston Rockets NBA team, controls the Golden Nugget enterprise.

On the other end of the scale, DKNG stock had a far more muted session. Sure, it was up on the day but only by about 1.5% — really, a pittance compared to GNOG’s staggering rise. But the real question is whether the buyout is a profitable decision for DraftKings.

On the surface, any trepidation toward the underlying online gambling market seems ridiculous. Thanks to a Supreme Court decision that opens the door for individual states to decide whether or not to legalize sports wagering, DKNG stock seems a no-brainer. While the two are not related, most Americans overwhelmingly support “botanical” legalization for medicinal or recreational purposes.

That being the case, it’s not a stretch to assume that Americans will also get behind games of chance. Reading between the ideological lines, it appears that most of us simply want the government out of our bedroom, living room and grow room. Naturally, this bodes well for DKNG stock.

Actually, I should say it bodes well theoretically for DraftKings. Unfortunately, its price action has been somewhat disappointing, which should inspire investors into another round of due diligence.

Are Memes and Cryptos Holding DKNG Stock Back?

While Golden Nugget is the obvious winner today, its shares and DKNG stock carry certain similarities; namely, over a longer term framework, their market valuations seem suspect.

For instance, I mentioned that GNOG went full circle and back because that’s exactly what it did. Launching an initial public offering via a reverse-merger with a special purpose acquisition company, GNOG started off at $10 per share. It exceeded $27 a pop before dropping very close to its original $10 offering price.

Now, it’s back up to around $19. Against the trailing six months from Aug. 9, GNOG just barely broke above parity. In the same period, DKNG stock is down over 12%. Why?

Part of that has to do with the difficulties involved in states attempting to legalize sports betting. For instance, World Sports Network warns that presently, “there is no legal sports betting in California live or on the internet. The sites that are available for California residents to bet on are hosted offshore and operate in a legal grey area.”

Also, while California is the “holy grail” of online sportsbooks, “there are some serious challenges in CA, primarily navigating the tribal casinos.”

More significantly, though, DKNG stock might encounter headwinds from basic economic principles regarding the reality of scarcity. In other words, there’s only so much money in this world. Thus, when people speculate on things like meme stocks or cryptocurrencies, that leaves less room for other endeavors like sports betting or any other kind of gambling.

It’s a question that The Economist posed when it asked if meme stocks are harmless fun or “a threat to the financial old guard.” Personally, I doubt that Wall Street fat cats are losing sleep over meme traders. But DraftKings executives should worry — if retail investors dive into memes or cryptos, there’s less room for retail gambling.

Insiders Are Selling Too

While I’m not going to tell you what to do with DKNG stock, I’ll leave you with this tidbit. If you look at insider transactions, DraftKings execs have been selling, not buying. Of course, this doesn’t necessarily mean that DKNG is doomed for volatility later. But it has to raise eyebrows, especially if you’re thinking about betting on this name.

You see, it’s not just about the selling. Rather, under the principles of capitalistic rationalism, insiders necessarily see greater value in cash rather than holding DKNG stock. Moreover, as a growth play, that thought process is particularly problematic. It suggests that there are better opportunities available for your money than DraftKings.

Therefore, if you’re going to bet on DKNG, you may want to perform additional due diligence. Either way, you should definitely exercise caution as DraftKings itself is making a heavy bet with its GNOG acquisition, especially at a time when so many elements are competing for consumer dollars.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/economics-101-forces-dkng-stock-rethink/.

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