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All Bets Are Not Off for the Future of DraftKings

The 2020 pandemic was so unique that we can use it as a benchmark for years to come. For example, on Wall Street, investors still often refer to a current stock price level versus the March 2020 crash. Today, we will make the argument for owning DraftKings (NASDAQ:DKNG) stock as it returns to its pandemic levels. Not much has changed in its fundamental outlook, yet DKNG stock cannot find support.

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

After peaking in March of 2021, the stock has given back as much as 75% of its value. Moreover, it is now near levels it was last at in March of 2020. Only during the pandemic lockdown did the stock go lower. Therefore logic suggests that the sellers have taken it as far as they should. Those who are still long the stock have missed the opportunity to panic out of it for now.

The long-term outlook for the company remains bullish. But first it needs the indices to stabilize in the near term. While there is downside pressure from several angles, not many of them come from within the company itself.

The current trend on Wall Street is to sell small-capitalization stocks regardless of quality. Anything that smells like an ARK Invest stock has no love among investors.

In addition, investors have a habit of going too far in either direction. They went crazy bullish out of the pandemic, and now they are swinging back the other way. Eventually the pendulum will stabilize, but for now the selling persists. This week should be pivotal for equities, after the Federal Reserve announces its plans. They will give us more details about how aggressive they will be unwinding the quantitative easing.

They had been trying to reflate the economy through extremely accomodative measures. Finally, they’re going to attempt to tighten rates one more time. They tried this back in 2018 and they failed miserably. After causing a market crash, they had to restart the QE that they are trying to end now.

I would suspect that prudence will be on their agenda. Otherwise they would risk breaking the very economy that they spent trillions fixing.

DKNG Stock Needs a Bit of Hopium

DraftKings (DKNG) Stock Chart Showing Pandemic Base
Source: Charts by TradingView

Fundamentally, DKNG stock is still too young to earn the benefit of the doubt from investors. Last year’s profit and loss statement had some investors concerned about the revenue line. That is a worrying development for a company in its growth stage.

In all fairness, we are still in the pandemic, so sports activities were below normal as a result. Eventually when the world goes back to normal the opportunities will be more plentiful. Until then, investors in DKNG have to rely on a bit of hope of future successes.

In addition to the sales problem, there’s also the issue of excessive spending. In the trailing 12 months, the company registered over a $1 billion net loss. Investors are fickle to begin with, and having these iffy metrics makes matters much worse.

However, the industry for DraftKings is still budding, so the rules are still in flux. I bet that they are early enough movers that they have an advantage there.

The analysts who cover it have assigned it an average price target of $56 per share. This is more than double its current levels, so they too agree on potential upside. However therein lies some headline risk, because eventually they will have to revise their ratings. Currently 18 of the 32 analysts have DKNG stock as a buy. If the price action doesn’t improve soon, they may need to lower their expectations.

In fact this happened already this week, where an analyst cut their price target down to $46 per share.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2022/01/all-bets-are-not-off-for-the-future-of-dkng-stock/.

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