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It’s Time to Hit the Breaks on DraftKings Stock

With sports on hiatus, is now a good time to buy DraftKings (NASDAQ:DKNG)? Not so fast! Despite the obvious impact of the novel coronavirus, the sports betting/fantasy sports giant is near all-time highs. And that’s no surprise. There’s a lot opportunity with DraftKings stock.

It's Time to Hit the Breaks on DraftKings Stock

Source: Lori Butcher/Shutterstock.com

Legalized sports betting is a major megatrend for this decade. Starting in 2018, when the Supreme Court overturned laws limiting full-on legal sports betting to Nevada, states from coast to coast have legalized wagering on sporting events.

But it’s not just casinos that could cash in from this change. It’s operators like DraftKings as well. Operating sportsbooks on behalf of casinos, large operators could quickly dominate the marketplace.

Yet, that doesn’t mean shares are a great buy at today’s prices. And not because of the coronavirus. You have to know that pandemics come and go. Once the current outbreak subsides, sports will come back. In a big way.

We already know the NFL isn’t delaying this fall’s football season. Other major sports leagues like the NBA will probably follow suit.

In other words, millions of Americans will soon get their sports fix again. Not just watching them, but betting on them as well.

No, it’s not current headwinds that’s the problem. It’s valuation. But on a pullback, DraftKings stock is a great opportunity.

DraftKings Stock and the Sports Betting Gold Rush

Don’t take my cautiousness on DraftKings to mean I’m bearish on the company. Far from it. Among the many sportsbook operators, this is one with fantastic prospects. To explain, let’s break down how legalized sports betting is playing out in America.

If you’ve been to Vegas, I’m sure you’re aware how sports betting works there. Major casinos owned by Caesars Entertainment (NYSE:CZR), MGM Resorts (NYSE:MGM) and Wynn (NASDAQ:WYNN) operate on-site sportsbooks. They book the bets, and keep the net winnings.

But in the jurisdictions just opening up, it’s a bit different. Most states that have legalized sports betting (like New Jersey) grant licenses to land-based casinos and racetracks. But these gaming properties are allowed to provide sub-licenses (also known as “skins”) to sportsbook operators like DraftKings.

This is a good and bad thing for DraftKings. The plus side is that the company doesn’t have to invest millions acquiring gaming properties just to operate in a certain state. The downside is that, in many cases, states have allowed casinos to sub-license multiple “skins.”

That means big competition in this industry. A key competitor is FanDuel (another fantasy sports site turned sportsbook), which is owned by global gaming giant Flutter Entertainment (OTCMKTS:PDYPY). Another is William Hill (OTCMKTS:WIMHY), a long-standing U.K.-based sportsbook operator, now with a large U.S. presence.

Yet, DraftKings’ relationship with another favorite gaming stock of mine, Penn National (NASDAQ:PENN) could be key to their long-term success.

DraftKings and Penn National

As I discussed last month, PENN stock is a great long-term opportunity to play the sports betting trend. The company’s recent acquisition of a stake in Barstool Sports means instant access to millions of potential sports betting customers. In other words, a multi-billion dollar opportunity.

Yet, Penn National isn’t the only stock that could win big from this development. DraftKings is as well. The company last year broadened its existing relationship with the casino operator. Granted, these “skin” deals don’t give the company exclusive access. In many of these states, Penn also provides sub-licenses to other operators, like PointsBet (OTCMKTS:PBTHF) and The Stars Group (which recently became part of Flutter Entertainment).

Nevertheless, the Penn National relationship is a strong reason to consider this stock down the road. But, why not now? As I said above, my main concern is valuation. Even with coronavirus putting live sports on hold, investors have bid up shares in the company, which only recently went public.

And I don’t blame them. This is a fantastic opportunity. Just not at today’s valuation.

My Take: Wait for a Pullback Before Buying

DraftKings is one of many eyeing for a piece of what could be a $8.4 billion industry by 2030. And through their continued partnership with Penn National, the odds of grabbing large market share are on their side. Yet, I wouldn’t rush out and buy shares as soon as possible.

Don’t get me wrong. This is a fantastic long-term opportunity. At the right price. After we get over today’s crisis, we are on track for what I like to call the “Roaring 2020s.” Megatrends in motion, like legal sports betting, will continue.

But today, shares are overvalued. Wait for DraftKings stock to pull back a bit before entering a position.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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