With the advent of online gambling moving across America state by state, should DraftKings stock be a buy for growth investors?
Sports betting was legalized at a federal level in 2018 and at the most recent count, 20 states have some form of it permitted. The legalization has shone a spotlight on the burgeoning online gambling industry, and one recently public company has been getting some significant attention from investors and posting impressive gains, but should you buy DraftKings (NASDAQ:DKNG) stock?
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With this new opportunity comes a diverse field of competitors arising to stake their claim for the growing market. It comprises of long-established casino companies like Penn National Gaming (NASDAQ:PENN), which is going through a digital transformation thanks in no small part to its stake in cultural phenomenon Barstool Sports, European stalwarts like Flutter Entertainment (LON:FLTR) which owns FanDuel, and even recently IPO’d technology companies like GameAccount Network (NASDAQ:GAN) which describes itself as a turnkey online casino solution.
The Bull Case for DraftKings
DraftKings is at the head of a nascent industry that is looking set to grow significantly. Some obvious immediate opportunities for the business include the return of live sports, more states legalizing sports betting, and the expansion of in-game betting, which CEO Jason Robins has called the company’s “No. 1 focus from a product perspective.” Robins made the comparison to the U.K., stating that “in-game is about 75% of the revenues at sports books” and “you can bet on almost anything” in an English Premier League game.
The U.K. comparison is an interesting one because it outlines the potential of the new sports gambling industry in the U.S. Sports and gambling are intrinsically linked on this side of the pond. For better or worse, there is a strong culture of sports betting, especially amongst young males. If the same culture were to be cultivated in the U.S., with a year-round sports calendar at their disposal, the upside for DraftKings could be immense.
Perhaps one of the most attractive aspects of investing in DraftKings is that it’s a pure-play for online-betting in the U.S. While its competitors provide online sportsbooks, an investment in Penn would also encapsulate buying into over 40 casinos across North America, while purchasing Flutter stock also means owning a stake in more than 600 traditional betting shops across the U.K. and Ireland as well as an online poker business. DraftKings is leaner, more scalable, and has one sole focus which investors will find enticing.
The Bear Case for DraftKings
The valuation of DraftKings and the hype surrounding the stock should be a concern for potential investors. It is now the second-biggest U.S. gambling company in market cap off the back of $430 million in revenue last year. To put this into context, the biggest U.S. gambling company by market cap — Las Vegas Sands (NYSE:LVS) — brought in $13.7 billion last year.
This growth story is coming at a seriously high premium, affected in no small part by its pure-play status. I wrote recently about the similarities in DraftKings’ story and those of Beyond Meat (NYSE:BYND), Virgin Galactic (NYSE:SPCE), and Tesla (NASDAQ:TSLA) here. While being a pure-play is inherently a good thing, the ensuing stock behavior of wild swings and unsustainable valuations could lead to a few sleepless nights for investors.
So, Should I Buy DraftKings stock?
DraftKings is in an enviable place in the industry. It has a well-established brand, a growing customer base, 43 potential U.S. states it can move into, and a good balance sheet with $450 million in cash and no debt on the books. CEO Jason Robins has outlined clear goals for the business moving forward, including a path to $1 billion in annual earnings, although no time has been set for this achievement.
The way the company has used its dominant position in daily fantasy sports to gain an upper hand in the online sports gambling industry shows strong business acumen from its management, and I’m also impressed by the resilience of the company in a time of no live sports. Offering markets on esports and ping-pong indicates a level of ingenuity and pragmatism from the business, as well as a clear demand from customers.
I have high hopes for this company and think it’s in a prime position to take control of the online sports betting industry as more and more states begin to legalize it. My one caveat is that the stock may race ahead of the business and lead to some unsustainable valuations. If you do choose to invest in Draftkings, I would suggest keeping a long-term outlook on the stock and give less heed to the daily fluctuations which are sure to come.
DraftKings went public under the ticker symbol DKNG on Friday 23rd of April 2020 through a merger with SBTech and Diamond Eagle Acquisition Corp, a blank cheque company that was already publicly traded. The merger allowed DraftKings to go public without an IPO or direct listing.
DraftKings has a market cap of just under $11 billion.
In 2019, DraftKings brought in revenue of $430 million.
Whether DraftKings is legal or not depends on where you live. While sports betting was legalized federally in 2018, each state has the power to pass laws that regulate it. While DraftKings Daily Fantasy Sports is now available in more than 40 states, its online sportsbook is currently only available in 7 states. Where is sports betting legal?
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold positions in companies mentioned above. Read our full disclosure policy here.