Let’s not fool ourselves. The situation with DraftKings (NASDAQ:DKNG) stock is terrible.
While DKNG stock may eventually transition into a viable discount – and some evidence calls for that – you’ve got to focus on the immediate threat.
Right now, that threat is market panic, plain and simple. As you know, the Federal Reserve is not really a friend of risk-on assets. Due to soaring consumer prices, the central bank is worried about inflation spiraling out of control. Now, there’s some debate about whether this inflation is due to the unique disruptions of the coronavirus pandemic or something more deeply ingrained.
Nevertheless, the Fed will likely adopt an aggressively hawkish monetary policy to keep asset bubbles in check, if not outright deflate them. Of course, such a pivot isn’t ideal for growth-driven narratives, which have benefited throughout the new normal. Now, the trend is shifting to the opposite direction, siphoning interest away from names like DKNG stock and into stable, dividend-paying investments.
The resultant damage is, if you haven’t checked, horrifying. DKNG stock is down nearly 20% in 2022. Over the trailing six months, though, shares have plummeted over 54%, reflecting the worst of the performances printed by technology-related platforms.
As well, we need to keep in mind that DKNG stock entered the public arena via a reverse merger with a special purpose acquisition company. Although SPACs are interesting vehicles in that they facilitate greater access for retail investors to participate in ground-floor-like opportunities, it’s the sponsors that are laughing their way to the bank.
Indeed, at a few cents below $22, DKNG stock risks falling closer and closer to its initial offering price of $10. This is its overriding reality.
DKNG Stock Could Recover in the Future
Often times during pronounced market movements – whether to the upside or down – analysts will remark that you shouldn’t fight the tape. Sure, you might have a sensible thesis that contrasts with the present momentum. However, the kinetic energy of the target security could be too powerful for a minority of contrarians to overturn.
Therefore, my message for DKNG stock is simple. Don’t fight the tape. If you do, you want to nibble at it. Certainly, you should keep the powder keg dry for additional discounts.
However, a solid chance exists that DKNG stock will eventually stabilize. In large part, this may be due to the underlying fundamentals. According to a gambling participation study conducted in Iceland during its financial crisis from 2007 through 2011, researchers noted “a considerable increase in gambling behavior over a 3.5-year period.”
Further, they observed a strong temporal association between individual financial difficulties and “increased participation in lotto and scratch tickets.” As well, other analyses bolstered the claim that “economic cycles (as a macrosocial factor) and individual gambling behavior are strongly related.”
Still, it’s important to point out that the researchers did not see an increase in problematic gambling during Iceland’s crisis, which bodes well for DKNG stock if the same psychological trends apply here in the U.S. Primarily, if this country falls into a downturn, people may participate in sports betting – DraftKings’ core business – as an escape or for personal enjoyment and entertainment, but do so responsibly.
After all, what makes DKNG stock fit somewhat neatly into the vice investment arena is that gambling platforms tend to exploit the uneducated or the disadvantaged, whether by direct intent or as an indirect consequence.
Thus, from the research, gambling proponents can apparently have their moral cake and eat it too.
Interesting Thesis, But Focus on the Threat
If constructive dialogue with a group of thugs doesn’t pan out and you’re forced into a street fight, it’s best to keep your feet moving and try to funnel your attackers in front of you, dealing with each threat as it breaches your impact zone.
It does no good to formulate a defense for the second attacker if the first one knocks you out. So it is with DKNG stock.
Some of the long-term fundamentals for DraftKings are very encouraging. However, that’s not the focus right now. For whatever reason – good, bad or indifferent – DKNG is plummeting. In my opinion, it’s better for shares to establish a support line before plunking down a major portion of your risk capital.
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.
