DraftKings has come a long way since starting out as a daily fantasy sports app, but is it time to invest following a recent decline?
Oct. 16, 2021
DraftKings (NASDAQ: DKNG), founded in 2012, had its humble beginnings as a daily one-on-one fantasy baseball app. Since then, it has grown its product line to include multiple fantasy sports offerings and became the first-ever legal mobile and online sportsbook in the history of the United States.
Down almost 33% on its year high of $74.38, DraftKings has seen a small rally over the past couple of days. This follows a report from Citigroup analyst Jason Bazinet claiming that the stock is “well-placed to capitalize on market consolidation and user expansion.” Bazinet and Citigroup initiated coverage of the stock with a buy rating that resulted in a 4% rise on Monday.
The Bull Case for DraftKings
The U.S. gambling market is rapidly expanding. Areas once strictly opposed to gambling have been lifting betting restrictions across the country. This sets a precedent for further expansion of DraftKings’ product line across the entirety of the United States.
DraftKings has also aligned itself well strategically with numerous national partnerships. It is currently the official fantasy sports partner of the NFL, MLB, NASCAR, PGA Tour, and the UFC. Added to this, on Wednesday it announced a new partnership with the NHL and Turner Sports to become the official sports betting, fantasy sports, and iGaming partner of America’s foremost hockey league.
The recent announcement of a soon-to-be-built office in Las Vegas has given investors solid evidence of the companies’ continued growth. It has also expanded further into new markets with NFTs and iGaming both now forming parts of DraftKings’ strong line of products.
Despite a lack of clear profitability, DraftKings is certainly trending upwards with recent estimated earning revisions. The company lost $2.76 per share in 2020 but is only expected to lose $2.60 per share in 2021 and $2 per share in 2022. These estimates put the stock well on its way to future profitability.
Finally, DraftKings recently floated a sizeable offer to purchase Britsh gambling firm Entain. If this deal closes, DraftKings would gain access to both Ladbrokes Poker/Sportsbook and bwin online betting. It would also benefit from the technology capacities currently available at Entain.
The Bear Case for DraftKings
Arguably the biggest issue facing potential DraftKings investors is its lack of profitability. Estimates are certainly trending upwards but questions remain as to when the company will begin making a clear profit. Currently, DraftKings is burdened with high marketing and customer acquisition costs. Investors will have to weigh these financial issues against the admittedly increasing revenue generated by the company.
The Entain deal could also be cause for bearish sentiments. However, despite improving the offer recently, Entain is reluctant to sell and has so far rejected any advances.
Another issue is the existing partnership between Entain and gambling behemoth MGM Resorts International. This partnership means that MGM would have to approve any transaction that would create a competing business. However, if DraftKings is only looking for access to Entain’s vast technological capabilities, this approval process could be avoided.
And as if that wasn’t all too much, DraftKings also has a reputation as a meme stock. This status is what led to an inflated price following a short-squeeze earlier this year.
So, should I buy DraftKings stock?
DraftKings is in a strong position in a market that is only going to expand. It has overtaken FanDuel as the number one U.S. sportsbook app and shows no signs of slowing down. It weathered the storm of live sports being restricted throughout the COVID-19 pandemic and has come out the other side with new revenue streams in the form of iGaming and e-sports betting.
Overall, it has plenty of positive signs for continued future growth. Here at MyWallSt, we believe in thinking long-term. With this in mind, DraftKings has lots of potential for investors looking to buy and hold.
Quickfire Round
Is DraftKings profitable?
DraftKings is not yet profitable, it posted a loss of $1.2 billion in 2020.
Is DraftKings Legal in the U.S.?
Yes! DraftKings Fantasy Sports is legal in over 40 states, while its Sportsbook is legal in over 20 states and growing.
How does DraftKings earn money?
Most of its revenue comes from charging a commission on tournaments, sports betting, and other gambling products