Finding a floor at around $20 per share, after its continued plunge last month, to some now may look like a great time to get into DraftKings (NASDAQ:DKNG). Unfortunately, as the two factors that have pushed it lower continue? It may be too early to bottom-fish with DKNG stock.
What do I mean? First, there’s the bubble that emerged in gaming (gambling) stocks last year may continue to deflate. Second, the rate hike factor. With the market calming down, after worrying last month about interest rate increases that were larger and more numerous than previously anticipated, it may seem like the Federal Reserve’s tightening plans are priced-in.
However, with the central bank keeping its options open, rates could still go up much more, and much faster, than the market has accounted for in stock prices. That may mean more compression for DraftKings’ still-high valuation.
In short, it’s not a great buy today. Yet if these negative factors wind up happening, and shares get knocked down another 30%, 40%, or 50%? It may just well become a great opportunity.
Why DKNG Stock Could Keep Dropping
After falling more than 25% since January, and more than 50% since November, it may appear as if the dust is settling on the DraftKings selloff. Other U.S. sports betting pure plays, like Rush Street Interactive (NYSE:RSI), have started to bounce back. Shares in land-based casino companies with sportsbook exposure, like Caesars (NASDAQ:CZR), MGM Resorts (NYSE:MGM), have begun to recover as well.
DKNG stock itself may appear like it’s on the verge of beginning a comeback. Its short-lived spike last week may mean many on the sidelines are champing at the bit to get into shares at a “can’t miss” price. Still, trends continue to not be on the side of the sports betting industry.
Again, rising interest rates could continue to drive the frothy valuations of sports betting stocks lower. Especially if the Fed winds up taking more aggressive action to bring inflation under control. But alongside this, investors are continuing to sour on the economics of the sports betting/i-gaming industry.
Mainly, the high marketing/promotional costs required to attract customers. In addition, as Truist gaming industry analyst Barry Jonas pointed out, the high tax rates in newly-opened up jurisdictions like New York (51% of net win) could also make profitability difficult. These two factors may have played a role in Wynn Resorts’ (NASDAQ:WYNN) decision to put its sports betting unit up for sale at a heavily discounted price.
At What Price Would DraftKings Become a Buy?
At current prices, I’m taking a bearish view on DKNG stock. But that doesn’t mean I’m completely bearish on it. As bullish analysts like Morgan Stanley’s Thomas Allen have argued, it has leading market share in the sports betting industry. This, plus the expansion of sports betting into other large U.S. states (like California), points to continued high growth.
However, while long-term prospects remain bright, the near-term challenges could keep on overshadowing them. Depending on how much further these factors weigh on it? It may be enough to push this former special purpose acquisition company (SPAC) back down to its $10 per share offering price. If not that, a price not that far above it. Say, between $10-$15 per share.
If this happens (and I’ll admit it may be a big “if”), you want to dive in at that point. After another high double-digit percentage drop, it will get to the point where it’s truly oversold. At lower prices, it will no longer be trading at a high premium to peers, as a Seeking Alpha commentator recently said, remains a problem.
Furthermore, at a much lower price, it may have appeal as a possible takeover target. Caesars could grab it to bulk up its sports betting unit. In a weird twist of fate, instead of DraftKings buying U.K. sports betting company Entain (OTCMKTS:GMVHY), which it tried to do last year, MGM and Entain’s joint venture, which operates the betMGM app, gobbles up DraftKings while it’s on the cheap?
Hold Off for Now, But Pounce if it Drops Again
Admittedly, my suggested play with DraftKings (wait for it to drop to $10-$15 per share) isn’t foolproof. In hindsight, $20 per share could prove to be its floor. Those overly cautious (such as myself) could “miss out” on its comeback.
Then again, don’t assume that a “comeback” for this stock means a trip back up to its highs. Instead, a partial recovery may be the best case scenario. Weigh that against the chances that the issues that have knocked it lower continue to do so, and just like my InvestorPlace colleague Joel Baglole recently noted, shares at present prices aren’t worth the risk.
Unless it drops further, to a truly “can’t miss price,” continue to hold off on DKNG stock.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.