Since making its trading debut in April at an opening price of $20.49, DraftKings (NASDAQ:DKNG) stock is up over 60%. On June 2, DraftKings stock saw an all-time high of $44.79, and now it’s hovering at $32.50.
Boston-based DraftKings was set up in 2012 as a daily fantasy sports platform. Sarah Nelson of Harvard Medical School says, “Daily fantasy sports (DFS), a rapidly growing industry, allows players to create fantasy teams of real-life players and potentially win cash prizes, derived from entry fees.” Metrics from the Fantasy Sports & Gaming Association show that there are well over 60 million fantasy sports players in the U.S. and Canada.
The company is set to report Q2 earnings on Aug. 14. Market participants are wondering if DKNG shares could restart another leg up, or whether they should ring the cash register to take some of their paper profits.
In the long-run, DraftKings stock is potentially a solid buy to participate in fast-growing sports betting industry. There may be short-term volatility in DKNG stock soon. Therefore, if you are not yet a shareholder, you may want to wait until the company releases earnings. A drop toward the $30-level or even below would make the shares more attractive. Here’s why.
DraftKings Is a Young Company
In the U.S., DraftKings and FanDuel, which is part of the UK-based Flutter Entertainment (OTC:PDYPY), are the two main platforms for sports and sports fantasy betting. DraftKings went public in late April via a special-purpose acquisition company (SPAC), instead of a conventional IPO. It merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded, and SBTech.
Recent research led by Nebojsa Dimic of University of Vaasa, Finland concludes:
Structured as “blank checks” or shelf companies SPACs register with the SEC an intention to conduct an IPO… and are formed with a sole purpose to obtain financing in primary capital markets and to use raised capital to finance an unknown acquisition… SPACs represent about 13% of the entire U.S. IPO market volume-wise in the period 2003-2018, while in the last two observed years, they represent more than 20% of the market.
Put another way, a SPAC raises public funds for the sole purpose of acquiring a private company. Therefore, by merging with a SPAC, a company can avoid going through many hurdles to go public or sell new shares.
Diamond Eagle listed in 2019 at $10 a share. In Dec. 2019, it announced that it would merge with DraftKings. Then Diamond Eagle changed its name to DraftKings and changed its ticker. In a matter of months, Diamond Eagle shares moved as high as $18.69. Boston-based DraftKings stock was officially listed on the New York Stock Exchange on April 24.
The Street initially debated the timing of going public in the midst of the global pandemic. After all, there have been no live sports to bet on for some time now.
What to Expect From Q2 Earnings
In mid-May, the group released its first quarterly statement. Revenue increased 30% on a YoY basis to reach $88.54 million. However, it also reported a net loss more than twice as high as a year ago. Finally, the group had close to half a billion dollars of cash on the balance sheet.
Management described the key priorities as entering “new states, investing in product and technology to create more unique offerings and live betting for American-based sports, and acquiring and retaining our customers.”
Due to the pandemic, major sports have not been held during the quarter. In order to keep customers engaged, DraftKings created new product offerings such as fantasy sports and betting on eNASCAR, Counter Strike, and Rocket League. It also launched a series of pop culture free-to-play pools contests that cover topics from democratic debates to reality competition TV shows.
When the group reports in a few days, the Street is not expecting a big improvement in fundamental metrics. The company’s growth projections rely on an increasing number of people betting on sporting events. But until sports resume, there cannot be much revenue for the group.
Therefore, the Street will likely be interested to know if management sees a major impact to FY2021 or long-term plans due to the COVID-19 pandemic. In case of dire projections, investors could easily hit the “sell” button.
DraftKings Stock Has Long-Term Catalysts
2018 was an important year for the evolution of DraftKings’ business model. In May 2018, the U.S. Supreme Court struck down the Professional Amateur Sports Protection Act (PASPA), the federal law that had essentially limited sports betting to a number of states, i.e. Delaware, Montana, Nevada, and Oregon, for the last 25 years. As a result, other states got the green light to establish their own regulated sports betting.
Following the ruling, DraftKings CEO Jason Robins said legalized sports betting would become a big industry. Fantasy game providers have more options to allow gambling, as people can gamble on the outcome of games or point totals.
Recent research concludes that between 2020-2024, the U.S. fantasy sports market is expected to grow by $9.34 billion at a compound annual growth rate (CAGR) of 10%. Similarly, the U.S. sports betting market is expected to hit $5.7 billion by 2024.
Management has recently moved into the more traditional side of the betting industry. In late July, the company became the first “Official Betting Operator of the PGA TOUR.” This multi-year golf-betting agreement could mean increased potential revenue for DraftKings.
Those investors who want to capitalize on the potential of sports betting as well as the growth in fantasy sports in the U.S. may want to consider doing further due diligence on DraftKings stock.
So Should You Buy DraftKings Stock Now?
In recent years, daily fantasy sports has become an immensely popular activity. Yet it is not yet definite when professional sports will fully be back in our lives. Until then DraftKings stock is likely to be highly volatile. Around its earnings release in the coming days, it is likely to come under pressure.
If you are an investor who also follows technical charts, you may be interested to know that a decline toward the $30-level or even below is likely.
Potential long-term investors may want to see how the next several quarterly reports will come out. With a newly listed company, it is important to see the trend in its fundamental metrics.
Such a wait may also be important if our economy does not pick up as fast as initially priced in by the equity markets. Growth companies like DraftKings tend to burn through cash extremely fast. In case the company does not generate enough revenues, it may easily run into a financial headache.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.