Sports betting has been a hot trend for investors for good reason. The industry is about to see incredible growth as several U.S. states look for ways to pay off some of the damage done by the novel coronavirus. That optimism about the sector has carried DraftKings (NASDAQ:DKNG) markedly higher over the past few months. But with DraftKings stock up 70% so far this year, investors might want to put it on their watch list to buy on a pullback rather than chasing this rally.
There’s no question that in the long-term, DraftKings looks like a great bet. But near-term uncertainty and a meteoric rise to all-time highs over the past few weeks means investors might want to give the stock some time to settle — especially with all of the uncertainty facing the market right now.
The Case for DraftKings Stock
Importantly, DraftKings is well-positioned to capitalize on the pent-up demand for sports gambling. In New Jersey, a key market for sports betting in the U.S., revenue surged in June despite an anemic sports schedule. That suggests people are chomping at the bit to resume their normal betting habits — it’s only a matter of time before the industry is back in the swing of things.
And online sports betting, DraftKings’ specific niche, is set to do even better. At the moment less than half of the U.S. states allow online sports betting, and many stipulate that players must visit a casino in order to place bets. That’s likely to change quickly over the next year as state governments look to plug the holes that the coronavirus left in their budgets.
As more states start to relax their gambling restrictions, online sports betting is seen becoming an $18 billion market.
DraftKings Is Overbaked
It’s not that DraftKings stock is terrible — the company has a ton of long-term potential. But the stock has been thrust into the spotlight at a time when traders are grappling for ways to profit from the stock market’s pandemic uncertainty and that has inflated its value significantly.
There’s a good chance that the past few days of declines for DraftKings will turn into a pullback. That’s especially likely if professional sports remain under pressure from Covid-19. With the National Basketball Association kicking off its season this week, many are optimistic about the full-scale return of professional sports.
But as new Covid-19 cases surge in Australia, investors should keep in mind that a winter wave of new cases is still entirely possible. There’s also a chance that someone within the NBA tests positive and the games have to be postponed or canceled.
There Are Risks Ahead
DraftKings stock is trading at 651 times its earnings despite the near-term risks that the coronavirus presents, meaning investors are betting on DraftKings to dominate the industry once the pandemic is under control. But even without the new virus on the table, DraftKings won’t just sail into the top spot among sports betting sites.
DraftKings is competing with huge names like Las Vegas Sands (NYSE:LVS) who also operate on-the-ground casinos, as well as hybrid names like Penn National (NASDAQ:PENN) that own casino properties as well as online gambling assets. On top of that, international players like William Hill (OTCMKTS:WIMHY) will be tough opponents considering their vast experience in online sports gambling in Europe where the market is far more developed.
On top of that, investors are betting on a stock that requires a shift in legislation in order to thrive. While most expect to see laws surrounding online gaming relax, nothing is ever certain when it comes to bureaucracy. At best, it will be a slow process. At worst, it might not happen in several states.
Finally, there’s the threat of a deep, prolonged recession ahead, which is never a good thing for the consumer discretionary sector. Until it’s clear how the world will move forward with the coronavirus, no one can predict with certainty the direction of the economy. There’s a chance that high jobless figures could remain, leaving many households straining to keep the lights on, let alone gamble.
The Bottom Line
DraftKings should absolutely be on investors’ radars. The online gambling trend is one worth following and Draft Kings’ stock is a major player within the space. But instead of jumping in with both feet, investors may what to wait for a pullback, especially with the future of professional sports clouded by uncertainty.
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.