Despite the agony and the countless frustrations of the novel coronavirus impact, Americans are a resilient bunch. Essentially, the markets reflected this sentiment — driving far higher ahead of the fundamentals. And among the beneficiaries was DraftKings (NASDAQ:DKNG). In fact, beginning in early April, DraftKings stock started to climb in anticipation of the return of sports.
That said, we all know what happened next. Between April through the end of May, DraftKings stock soared over 237%. But at the beginning of the rally, many people were skeptical. After all, the April jobs report indicated widespread pain, with the Covid-19 pandemic axing 20.5 million occupations. In addition, new daily coronavirus cases were moving rapidly higher — causing deep concerns about social stability.
Fortunately, government and health officials — along with a reasonably compliant public — did their part to stem the tide. As the acceleration of cases declined, more states decided to open their doors for business. And this dynamic was well-represented in the May jobs report. Rather than a doom and gloom picture that so many economists predicted, total non-farm payroll employment increased by 2.5 million.
In turn, that bodes very well for DKNG — as the more people who are back to work and earning consistent paychecks, the better for the gaming entertainment app. And specific to DraftKings stock, the return of sports is obviously the most important development.
A few weeks ago, we saw NASCAR resume its pandemic-disrupted season. Just recently, rival motorsport league Indycar started its season at Texas Motor Speedway. Also, viewership stats for this race were the highest for the series since 2016 excluding the flagship Indianapolis 500.
Therefore, since not too many people tune into non-marquee auto races, this was a big boost of confidence.
DraftKings Stock Is a Great Idea at a Bad Price
Clearly, we’re seeing pent-up demand at work. When you look at the broader sports segment, you’ll notice that it’s extremely crowded. Aside from the big three of football, basketball and baseball, you have hockey attempting to gain market share. Also, the older crowd still loves their PGA tournaments, while younger folks are attracted to mixed martial arts.
On top of that, you have European soccer leagues (which have begun reopening to closed stadiums), along with women’s professional leagues represented across a variety of sports. Thus, for an Indycar race to attract big crowds relative to its history is saying something. And over the long run, you’ll want to have some exposure to DraftKings stock.
Additionally, Las Vegas recently welcomed guests and they came in droves. Despite concerns about infections — particularly in indoor settings — many crowded into casinos. And while you might question their judgment, this is the takeaway: many, perhaps most, Americans are tired of sitting at home and want their lives back. That means sports and entertainment, which again is a huge positive for DraftKings stock.
Where I have an issue, though, is the price of DKNG stock. It’s fair to say that most of the enthusiasm has been reflected in its market value. Therefore, for people to justify buying shares now implies that another big catalyst lies over the horizon.
In the near term, there could very well be a catalyst. But that doesn’t necessarily mean it’s an upbeat one.
Primarily, upcoming initial weekly jobless claims will be critical. If they continue to number in the millions, that would strongly imply that high-paying, white-collar jobs are getting pink-slipped. This has greater meaning for DraftKings stock because you must have discretionary funds to participate in gambling.
Current Risk-Reward Profile Suggests Waiting
Another factor that could pose problems for DKNG stock is the number of coronavirus hotspots that have sparked in different areas around the country. Most notably, the Texas Department of State Health Services recently reported that it set a record high for Covid-19-related hospitalizations.
Also, the former head of the Food and Drug Administration — Dr. Scott Gottlieb — warned that the nationwide protests calling for justice and social equity would unquestionably lead to a spike in infections. And considering that May’s jobs recovery did not benefit workers across all racial/ethnic categories, this imbalance will likely fuel more anger.
Overall, it’s possible that a second wave could disrupt the return of traditional sports leagues. However, that’s not to say that DraftKings stock isn’t a buy. Instead, by merely waiting out this storm, interested buyers can get in at a much more attractive price.
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.