DraftKings Inc. (NASDAQ: DKNG) has taken a rocket ride since going public via a reverse merger with a blank check acquisition company earlier this year.
The stock has almost tripled as investors raced to cash in on the sports betting and online gambling business. Big-name investors like George Soros have been buying shares of the online gambling company, and news of their buying has further fueled the rise of the stock.
DraftKings is an online sportsbook and "fantasy" sports platform. Users in states where sports gambling is legal can place sports bets directly through the DraftKings app, while users across the country can play daily fantasy sports games for cash prizes.
Since the Supreme Court struck down a federal law prohibiting sports gambling in 2018, 17 states have allowed some form of legal sports gambling.
It's only a matter of time before the rest of the country follows suit.
That has investors salivating over the prospects of owning stock in an early mover like DraftKings - a company with national exposure and brand recognition before the rest of the walls tumble down.
But there's more to this company than an app.
Here's what you need to know about DraftKings, including whether DKNG stock is one to buy right now...
Everything You Need to Know About Draftkings
It's not just the investing world hopping on the bandwagon.
Well-known figures in the sports world have also invested heavily. The Dolan family that owns the New York Knicks has almost 1.5 million shares of DraftKings. Jerry Jones, the owner of the Dallas Cowboys, owns shares. So does the New England Patriots owner Robert Kraft.
Walt Disney acquired an ownership interest in DraftKings when it closed in the transaction with FOX last year. SEC filings show it owns more than 18 million shares of the company.
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DraftKings is not just a sportsbook operation. The company pointed out that in a recent presentation that iGaming is nearly a half-billion-dollar industry in New Jersey. If you take that and extrapolate to what they expect to be more national acceptance of online casino gambling, the eventual market will be worth as much as $21 billion. That's based on 30% of the nation allowing casino gaming. DraftKings thinks it can take a market share of between 10% and 20% of those gamblers leading to gross revenue between $600 million and $1.2 billion.
Management has also said that they expect 65% of the country to allow online sports gambling, creating an $18 billion market. Here the company expects to have a market share of 20% to 30%, producing gross revenue of $2.3 billion to $3.5 billion.
They are off to a good start. In the first quarter, revenue was up 30%. Although many sports leagues are shut down, DraftKings got innovative to keep revenue growing. It allowed customers to bet on eNASCAR, Counter Strike, and Rocket League, as well as pop culture events such as the T.V. shows "Survivor," "The Last Dance," and "Top Chef." The company said in the press release that it expects the COVID-19 pandemic to have little to no effect on its business this year or next.
There is no question that the continued spread of online sports betting and casino games is a huge opportunity. States are going to need the tax revenue to shore up battered and busted budgets. That was true before the pandemic arrived, and it is even more true today. Sports leagues will eventually reopen, and DraftKings is going to be doing a fantastic amount of business and growing rapidly.
Then we should buy the stock, right?
Here's what you need to know before you buy DraftKings stock...
Why DraftKings Stock Isn't a Slam Dunk
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If we take DraftKings' most optimistic estimates of revenue, it adds up to less than $5 million in revenue. The stock market capitalization is currently about $18 billion, so the stock is trading at more than five times hoped-for eventual revenue right now. Right now, it is trading at 55 times actual trailing 12-month revenue.
Analysts do not expect DraftKings to be profitable until 2023 at best.
DraftKings is more richly valued than any U.S.-based gaming company except Las Vegas Sands Corp. (NYSE: LVS), which owns actual casinos in the United States as well as the highly lucrative Macau market in China that produced $37 billion in revenue last year.
While DraftKings is going to do well in the sports gambling and online casino business, it's not like they are the only game in town. There are lots of competitors, and more will spring up as more states allow online gambling and sports betting over the next few years
Does that mean you should avoid the stock?
It depends. DraftKings Is being valued like an Internet stock in the late 1990s or a cloud computing stock in recent years. Investors can buy the stock and take the ride like jumping into a high-tech stock in 1997. The momentum behind DraftKings is undeniable, and there is no way of knowing when the buying will stop. It will be a very news-driven stock, and right now, the news is pretty good.
DraftKings has a massive advantage over traditional casinos right now, as many of them are closed. Even those casinos that are open are limited by social distancing practices that restrict how many gamblers can be inside their walls.
Younger gamblers prefer online betting, and DraftKings has a massive database of their names. It also uses high-end data analytics to market to younger gamblers.
At least one analyst has a best-case scenario that eventually values the stock at about $75. That's almost three times the current price. We saw plenty of moves crazier than that in the Internet bubble, so I wouldn't rule out the chance it could happen with this stock.
But DraftKings is not a traditional investment opportunity. It is too highly valued at this price.
It could, however, turn out to be a pretty good bet on sports betting and online gambling.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.