DraftKings IPO Could Be One of 2016's Biggest - Even After Scandal

The daily fantasy sports company DraftKings Inc. is now valued at more than $1.2 billion, meaning the DraftKings IPO could be one of the largest initial public offerings of 2016.

And while the company has been getting headlines for the $426 million it had raised in private funding, the biggest news this week deals with the firm's "insider trading" scandal.

nflAccording to reports, an employee from DraftKings had access to "insider" fantasy football information before other customers and used the information to win $350,000 on rival site FanDuel.

New York Attorney General Eric Schneiderman has launched an investigation into both DraftKings and FanDuel. While the investigation is in the early stages, a FanDuel spokeswoman told ESPN that DraftKings employees have won roughly 0.3% of all the money the company has ever doled out. That could account for as much as $6 million.

Despite the scandal, DraftKings has some high-profile backers.

Some of company's biggest investors ahead of the DraftKings IPO have been Fox Networks Group, Major League Baseball, Madison Square Garden Co., and the National Hockey League. Other investors include New England Patriots owner Robert Kraft and an ownership group that works with the Dallas Cowboys and New York Yankees.

DraftKings allows users to compete in daily fantasy sports leagues and compete for daily cash payouts. Users can wager between $0.25 and $1,000 per contest on various sports, including the NFL, MLB, NBA, and PGA Tour, among others.

Company officials have said DraftKings sees roughly 50,000 daily active users during baseball season. During football season, that number balloons over 1 million. CEO Jason Robins said he believes the company will grow that number by 10 times during the 2015 football season.

And the company has a very lucrative business model. DraftKings takes 10% of every transaction that takes place on the site. In 2014, the company said it had more than $30 million in revenue. But that number will grow proportionately as the user base grows.

If you feel like you've been hearing about DraftKings lately, you're not mistaken. DraftKings has spent $81 million on TV ads since the beginning of August.

While the company is facing a major scandal at the moment, investors are still preparing for the DraftKings IPO in 2016. The company is simply growing too fast to stay private forever.

But should you invest in DraftKings stock when it comes to market?

What to Know About Investing in the DraftKings IPO

Because of its huge brand-awareness, it's a total possibility that DraftKings stock will climb higher following the DraftKings IPO.

But at Money Morning, we recommend waiting several quarters after an initial public offering before investing in a newly issued stock.

Typically, IPOs only benefit institutional investors like hedge fund managers and investment banks that are willing to buy large quantities of a stock before its debut. These Wall Street "VIPs" buy in at a very low price, much lower than you or I.

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Retail investors like us can only buy in once the stock begins trading. If there is high demand when the stock hits the market, we end up paying an immediate premium. When the new stock cools off, which it almost always does, retail investors are looking at a significant loss.

If you wait two or three quarters, you'll not only sidestep much of DraftKings stock's early volatility, but you'll also have a better grasp of the company's financial growth.

According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, there are still a few ways to collect the best IPO profits - that don't involve buying DraftKings stock.

Here are the three best ways to play the exciting IPO market...

The Bottom Line: The DraftKings IPO could be one of the largest financial stories of 2016, even with the industry's recent scandal. The industry is growing incredibly fast, and DraftKings has spent more than $80 million marketing itself recently. While the DraftKings IPO will probably draw in a huge number of investors, we recommend waiting for several quarters before investing.

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