If you’re looking for a transformative investment, online sports gambling firm DraftKings (NASDAQ:DKNG) crosses off many investors’ check lists. For one thing, after a 2018 U.S. Supreme Court decision struck down a 1992 federal law that prohibited commercial sports betting in most states, gamblers arrived in full force. Pent-up demand from the novel coronavirus quarantines has skyrocketed DraftKings stock.
But in my opinion, that’s also the problem for DraftKings. Don’t misread this because I’m very bullish on the company for the long haul. At the moment, though, I’m not a big fan of the crazy spike in market value. From the beginning of April to the end of May, DraftKings stock more than tripled. True, shares have come down since then. Yet I’m still biding my time.
Several factors concern me. First and most obviously, the pandemic is a major headwind. Currently, the new daily case numbers are jumping uncomfortably higher. Also, Covid-19-related hospitalizations are rising, bringing questions about the sustainability of a return to sports.
Second, competition is starting to weigh on the sector, making DraftKings stock no longer an exclusive pure-play online casino investment.
Recently, shares of Golden Nugget Online surged in its Nasdaq trading debut. Listed for now under the Landcadia Holdings (NASDAQ:LCA) entity, Golden Nugget will provide another option for investors looking to profit from the sports gambling arena. Technically, with DraftKings jumping into overheated territory not too long ago, Golden Nugget may appear a better deal for some.
Finally, with states pausing or rolling back their reopenings, it could temporarily hurt consumer sentiment. Given that gambling is of course a discretionary activity, loss of consumer confidence isn’t what DraftKings needs.
Pandemic Worries Top and Center Again for DraftKings Stock
Out of the headwinds mentioned above, the coronavirus is easily the biggest variable. Sure, Golden Nugget’s presence is a distraction, especially if you’re heavily vested in DraftKings stock.
However, we all knew going into this space that competition would be one of the drawbacks for DraftKings. Following the Supreme Court decision, a flood of demand hit the online sports betting industry, leading FT.com to label this phenomenon as the “gambling gold rush.” In other words, it’s a known risk.
Regarding the economic pressure, that’s a concern that applies to every sector, not just sports betting. I’ll concede that discretionary industries may suffer disproportionately. However, I’ve been consistent that pandemics come and go. Moreover, our country has adjusted relatively well thanks to remote work. Here, it’s an unknown risk that’s being somewhat controlled or managed.
But what we have zero control over is Covid-19. According to an AP report, New York Yankees closer Aroldis Chapman tested positive for the coronavirus. Chapman is the latest among high-profile athletes who came down with the virus. Even more startling, the Yankees are “missing star infielder DJ LeMahieu and right-hander Luis Cessa, who both tested positive last week and are still isolating at home.”
You have to appreciate the context. These are multi-million-dollar athletes who command big sponsorship money within the pro sports industry. Thus, team owners and managers have every incentive in the world to ensure their safety and health.
Further, these superstars represent premium physical specimens. If they’re getting sick — and quite frequently despite best efforts against infection — it doesn’t bode well once the season gets underway.
I’m not suggesting that sports leagues will cancel their seasons. However, with some collegiate conferences calling off fall sports, it makes buying DraftKings stock now a very risky proposition.
A Question of Integrity
If you ever sit down with sports betting aficionados, you’ll realize very quickly that they’re passionate about their target game. Typically, they’ll know player transactions and depth charts like an equity investor would know about market capitalization and dividends.
But with multiple athletes testing positive for the coronavirus and assuming that many more will test positive once play starts, it got me thinking — would this arbitrary loss of potentially key players impact how people bet on sports?
I don’t see how it couldn’t. Imagine trying to decipher the ebb and flow of Tesla (NASDAQ:TSLA) if the company didn’t have the Model 3. I’m not sure if any one player would have that dramatic of an impact to a team but you get my point. Even if pro sports leagues complete their seasons, the games themselves may look drastically different in this new normal.
Again, I’m bullish long term on DraftKings stock. However, the recent backdrop forces a tactical approach in an otherwise compelling story.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.