With a favorable Supreme Court ruling not too long ago, online sports gambling suddenly became a legitimate, viable industry. In many ways, it’s akin to the cannabis market — out of nowhere, a much-maligned plant is now legal in the U.S. (under certain conditions). Therefore, I really like DraftKings (NASDAQ:DKNG) and the implied trajectory of DraftKings stock.
However, what I don’t like is the price. And given all that has transpired, the smart play is to exercise some patience because its a compelling idea that has gotten a little ahead of itself.
I’ve been consistent on this strategy for DraftKings stock, and the price action of last Friday confirmed my argument. In its highly anticipated second-quarter earnings report, the company produced some figures that disappointed analysts.
Specifically, the gambling firm suffered a Q2 loss of $161.4 million, translating to 55 cents per share. Optically, this compared unfavorably to the year-ago quarter, where DraftKings produced a loss of $28.11 million or 15 cents per share. Ahead of the most recent quarter, covering analysts anticipated a per-share loss of 19 cents.
Quickly, DraftKings stock tumbled on the news. That’s despite the fact that revenue jumped to $70.9 million, well above the consensus target of $66.4 million.
Perhaps in any other circumstance, analysts granting the benefit of the doubt would have mitigated the damage to DraftKings stock. But in this new normal, people are more skittish with where they put their money.
The Other Side of the DraftKings Stock Story
Moreover, just as worrisome to DKNG stock stakeholders in the nearer term is the novel coronavirus. Recently, the Cincinnati Reds became the third Major League Baseball (MLB) team to have its games cancelled due to one of its players coming down with Covid-19.
Naturally, there’s much speculation running around about how baseball will handle the health crisis. And because the season just started, MLB is working with fewer games to begin with. That said, as we head closer to the playoffs, we could see unusual initiatives take place to salvage the season.
Of course, all eyes are on football — both the professional and college variety. According to a Washington Post report on Aug. 13, in terms of the latter:
“The Big Ten and the Pac-12 announced Tuesday their decisions to postpone the season. Outside the Power Five conferences, the Mid-American Conference and then the Mountain West Conference, which include 12 teams apiece, have both canceled their fall sports seasons.”
Additionally, in the National Football League, more than 60 players elected to opt out of the season due to coronavirus concerns thus far. So, overall, these situations do not bode well for DraftKings stock.
On the other hand, though, DKNG isn’t what you would term a speculative bet. Again, the company beat revenue expectations, and it should benefit from pent-up demand.
And I’m not just saying this. According to a Wall Street Journal report, the lockdowns and boredom have contributed to millions of quarantined workers opening investment accounts with Robinhood or E*Trade (NASDAQ:ETFC). Under any other circumstance, market professionals would welcome the influx of fresh blood. After all, stock market participants have been declining over the years.
But when you look at the terrible names that have soaked up investor dollars — Hertz Global (NYSE:HTZ) and Ocugen (NASDAQ:OCGN) being notable names — you realize that these folks aren’t investing; they’re straight up gambling!
Nonetheless, that’s not surprising given the many months we’ve had a dearth in live sports. And now that sports are coming back, some of those gambling funds could filter their way back to DraftKings.
It’s Good to Wait
Collectively, while I’m optimistic about the bigger picture for DraftKings stock, I’m ultimately going to wait this out. Don’t get me wrong — it’s on my watch list, as it should be on yours. But being bullish doesn’t have to equate to ignoring other signals.
In the worst-case scenario, we could see a severe disruption to baseball — causing the season to be cancelled. And with so many college football teams calling off their fall schedule, this presents a tough environment for DKNG stock. Thus, it’s probably best not to fight the tape here.
Instead, keep the powder keg dry, and consider this volatility to be a gift. This is a classic example of a great company (and a relevant industry) falling under hard times. That said, be sure to get in — but at the right price.
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.