- DraftKings (DKNG) is still strongly growing .
- Bears in DKNG stock have a struggling pay-to-play strategy and risk-minimizing environment on their team.
- Structuring an under bet in DraftKings with a June put vertical may be an appropriate position.
Amid red-hot inflation and tightening consumer wallets, many higher multiple growth plays have continued to feel Wall Street’s wrath. As much, it’s hardly surprising online fantasy sports, mobile betting and iGaming play DraftKings (NASDAQ:DKNG) stock has taken a dive.
Following 2021’s decline of around 41%, DraftKings’ shares have been sacked by a very similar 42% in less than four months. And with 18% of this year’s price drop occurring in April and putting DKNG stock at arm’s length from new relative lows, let’s just say that DKNG stock has proven a terrific bet on the under.
Today though, let’s review what else is happening in DraftKings shares, off and on the price chart and what, if any, course of action investors might consider going forward.
Bet on the Over in DKNG Stock
DKNG bulls may point out that DraftKings plunge of around 80% since March of last year is largely about broader collateral damage. And in fairness, many smaller, growth-oriented stocks whose stories live and die by interest rates such as SoFi Technologies (NASDAQ:SOFI), DigitalOcean Holdings (NYSE:DOCN) or FuboTV (NYSE:FUBO) and others have also been slammed hard too.
Bulls may also be gung-ho that betting on DraftKings at current prices isn’t about commiserating miserably. Today, it’s about taking advantage of a more extreme opportunity where growth could be colliding with value in DKNG.
At the moment shares trade at a historically low 5x sales while DKNG’s is priced at a mid-cap valuation of $6.75 billion despite its industry leadership. Also, DraftKings still managed to grow revenues of $1.3 billion by nearly 47% year-over-year and increase its monthly unique active customers by about 31% to almost two million.
Lastly, with U.S. sales doubling to nearly $53 billion in 2021, participation growing smartly among adults and DKNG’s mobile sportsbook only operational in just 17 states at the moment, DKNG stock has a strong opportunity to continue capturing growth.
DraftKings’ Strike Out
Source: Charts by TradingView
Not everyone is happy with DKNG’s costly pay-to-play strategy. For all the winning at DKNG, it’s been an expensive investment in marketing to get the outfit where it is today. And where it is today is narrowly behind privately-held FanDuel in market share with proportionately growing losses.
Bears numbering a modestly heavy 12% of DKNG stock might also warn that today’s spend, and cash burn aren’t sustainable, and the landscape may not get any easier either for DraftKings. For one, BetMGM from MGM Resorts (NYSE:MGM) is another sports betting platform that’s quickly gaining in popularity and whose superior financials may give it an added advantage.
And it’s not just three players either. Well-established companies like Caesars (NASDAQ:CZR), Penn National (NASDAQ:PENN) and Las Vegas Sands (NYSE:LVS) are all doing their own high stakes jockeying to capture the boom in online betting.
Lastly, there’s the price chart. Since a quick one-two punch from a botched cup followed by a channel breakdown last fall, it’s been the bears game to lose. Instead they’ve come out on the offensive in chopping DKNG stock down.
Most recently and with DKNG stock’s first advantaged position at reversing the price action, the bulls fumbled with a punishing monthly hammer failure as shares sank from a buy decision of $24.73 and through $16.56.
DKNG Stock Takeaway
Simply put, I’m more on the fence than wanting to take the over or the under in DKNG stock. Given the discussed pros and cons facing DraftKings, a volatile stock which doesn’t favor bulls or bears right now, as well as a broader market finding its own rally under pressure, keeping the powder dry seems prudent.
If I was forced to place a bet, I’d have to go with bearish positioning and a price target of $10 which is DKNG’s net asset value prior to de-spacing. But I’d only go short if shares take out the March low of $14.97 in conjunction with a bearish stochastics crossover.
Were those conditions met in the next week or so, I’d go with a bear put vertical. One such combination which makes sense off and on the price chart is a June $15/$12.50 bear put spread due to its short delta profile that can max out beneath $12.50, but maintains an ironclad defense in the event some of those other bullish pros take the field.
On the date of publication, Chris Tyler holds long positions in SoFi Technologies (SOFI) (either directly or indirectly), but no other positions in securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.