DraftKings Stock Has Favorable Long-Term Odds In Its Favor

A big part of successful investing starts with not making obvious mistakes. DraftKings (NASDAQ:DKNG) stock corrected 36% in two months, and is now 45% off its all-time highs. The easy opportunity has passed. Investors choosing DKNG stock from here onward have realistic expectations from here.

Image of the DraftKings app on a smartphone screen.
Source: Tada Images / Shutterstock.com

This is a relatively new stock to Wall Street, so it will need time to prove itself. Meanwhile the long-term prospects for the business model are viable. While DKNG stock has room to fall another 5%, the charts suggest that support is near.

The problem is that the fundamentals metrics are too new to second that opinion. Meaning the P&L is too young to to embolden a tangible financial thesis. We know that people love sports and they they will always want to gamble.

DraftKings’ business model tailors to both, so in the long run it’s a winner. It touches consumers directly, but also works commercially behind the scenes.

DKNG Stock Will Fight Its Way to Success

DKNG stock has been swimming upstream since its IPO. First, it came to market at the heart of the pandemic last year. Moreover, it chose the special-purpose acquisition company (SPAC) process, so it has that moniker raising concerns for many.

Most SPAC stocks did not do well after their initial spikes. But this one has a real business so it merely needs time to shine apart from the SPAC pack.

However, the rise in stock price from last year was sharp and that established the fall. Keep in mind that the stock markets are at all-time highs. If they correct, they will drag down everything. And stocks like this one will likely suffer harshly. It is also important to note that the industry also suffered. Therefore, it’s not likely that investors see specific fault in DraftKings.

So far my opinion has been positive on the long-term outlook. The experts on Wall Street second my opinion because most rate DKNG stock as a buy. Their average price target for it is $66.50 according to Yahoo! Finance. After a stock corrects as much as this one has, they are likely to come out in defense of it.

There Is Support Below

DraftKings (DKNG) Stock Chart Showing Potential Support Zone
Source: Charts by TradingView

Regardless, I trust the charts more than their opinions, because they contain actual data. At $40 per share, DKNG stock is at strong bounce levels from May. In addition, this has served as the baseline for last year’s September and November rallies.

This is proof that investors are confident owning it at these levels. The buyers are likely to show up within $2 of current price.

Since we cannot time stocks perfectly, investors should consider only partial positions. If you’re already long the stock, don’t add to it yet. Those who know options have many strategies to help hedge or leave room for error. Conviction these days should be more humble than usual. The macroeconomic conditions are favorable for bulls, but there are too many questions looming.

The Federal Reserve is in the process of ending its quantitative easing. Moreover, we may be facing a new Federal Reserve chair. The next few months will be pivotal for the economy. Consumer spending is still healthy and that’s 2/3 of the U.S. economy. Unless something breaks, we shouldn’t see a market crash. However, no one ever plans on having an accident, so we cannot discount the possibility of a black swan event.

In summary, I like the odds for more upside opportunities in DKNG stock from these levels. But I also insist on investors practicing caution for a few months.

On the date of publication, Nicolas Chahine 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.

Nicolas Chahine is the managing director of SellSpreads.com.


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