Perhaps one of the most ironic publicly traded entities to launch in recent memory is DraftKings (NASDAQ:DKNG). A very popular platform among sports betters and fantasy sports aficionados, DraftKings chose to go public via a reverse merger with a special purpose acquisition company (SPAC). Just on that fact alone, you wouldn’t expect DKNG stock to be as successful as it is.
SPACs are a funny animal. On the surface, they put public investors on the same playing field as everyone else. Until the blank-check firm announces a merger target, no one knows what the SPAC sponsors are thinking about in terms of a business combination. Still, you have the opportunity to take a blind wager at the typical initial offering price of $10 per share.
Earlier this year, Bloomberg labeled SPACs as the poor man’s private-equity funds. Ordinarily, retail investors would have no chance at buying new issues at their original price as underwriters prefer to dole out such shares to their choicest clients.
But there’s no such thing as a free lunch. And if you’re getting a free lunch on Wall Street, you should consider what’s really happening. As it turns out, the less-stringent regulatory environment of SPACs has largely ended up penalizing retail shareholders.
Suddenly, people are getting a bad taste regarding SPACs but that’s not the case with DKNG stock. On a year-to-date basis, shares are up over 33% while against its market debut, shares are up basically sixfold. The irony of course is that SPACs have become gambles — with the house enjoying a stark advantage.
But the one SPAC that has been a sterling representative in a sea of ugly? Yeah, it’s a fantasy sports and sportsbook platform — go figure.
Still, this unusually positive circumstance is facing its toughest challenge yet.
Can DKNG Stock Break Out of Its Sideways Funk?
Although DraftKings is an extraordinarily compelling platform, given the favorable legislative backdrop regarding sports betting, the fundamental tailwind hasn’t been entirely convincing. You only need to look at the aforementioned performance metrics for DKNG stock.
While being 33% up for the year is a major accomplishment, it’s comparatively disappointing when you consider what happened last year. DKNG stock moved up more than fourfold in 2020, boosted by rising expectations for consumer normalization following the novel coronavirus pandemic. As well, with professional sports leagues making a concerted effort to resume operations, this factor augured well for DraftKings.
Naturally, DKNG stock bounced higher from the brewing enthusiasm, contrasting sharply with the initial pessimism when Covid-19 initially struck. But in 2021, it seems that the market has largely priced in this fervor. What’s needed now is a fresh catalyst — and the apparent lack of it seems to be capping DraftKings shares.
Admittedly, the company has a major opportunity in places like California. While its fantasy sports platform is legal in the Golden State, the sportsbook element is not. Supposedly, the common argument is that as legislative momentum favors sports betting and as the opportunity costs for not realizing the industry’s revenue streams weighs heavily on politicians, California will soon legalize the practice.
While this concept is certainly in the realm of the possible, the question is whether it’s in the realm of the probable? Reviewing the matter, I’m starting to have doubts. Primarily, the sports betting legalization initiative in California has long hit roadblocks because gambling in the state is only allowed on tribal grounds. Therefore, online sports betting would compete against the tribes because participants can then wager anywhere.
It’s a political hot potato that few have been willing to touch.
All Eyes on 2022
Another wrinkle in the saga surrounding DKNG stock is California’s tribal leaders’ attempt to legalize sports betting and to funnel this practice exclusively in their casinos, thereby giving the tribes an exclusive monopoly. To accomplish this, a tribal coalition proposed a new initiative that “would blunt efforts to legalize internet sports wagering, which some out-of-state interests have sought to legalize in California,” wrote long-time Golden State pundit Dan Walters in June.
“Tribal leaders fear that if gamblers could place sports bets on their computers, they would be less likely to personally visit casinos. Conversely, if sports betting can only be done legally inside casinos, it could build foot traffic,” Walters wrote.
The issue will come up on the November 2022 ballot, which may have significant implications for DKNG stock. I’m not entirely sure that the implications are positive so it’s a matter to watch closely if you’re contemplating a heavy position in DraftKings.
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.
