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Why DraftKings Stock Is One to Buy After ESPN Deal

Matt McCall and the InvestorPlace Research Staff
·5 mins read

Last week, DraftKings (NASDAQ:DKNG) stock was trading well. Shares were climbing despite the overall market — and tech stocks specifically — taking a painful slide. Because of that strength last week, DraftKings stock was on a lot of investors’ radar coming into this week.

DraftKings (DKNG) logo on a phone
DraftKings (DKNG) logo on a phone

Source: Lori Butcher / Shutterstock.com

What many weren’t expecting, though, was such a sudden burst higher. Of course, that didn’t come because of traders grabbing the first thing they could find and jamming it higher. Instead, it came on a very important partnership for DraftKings.

The company formed a partnership with Disney’s (NYSE:DIS) ESPN. The multi-year deal will allow ESPN to become “the exclusive daily fantasy sports provider and co-exclusive sportsbook link-out provider.”

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In turn, when fans are checking out stories and updates on ESPN, linking out to DraftKings will only help increase traffic and retention for the latter. The benefits here are quite clear, and it helps that Disney has about a 6% stake in DraftKings.

DraftKings Gaining Momentum

The deal with ESPN is not necessarily the make-or-break for the company. However, it’s one more catalyst to help drive the company’s results forward. Overall, though, other waves are here, too.

Consider this: In the second quarter, we had a major shut down in the sports worlds. No March Madness, no NBA or NHL playoffs and a delay to Major League Baseball, among others.

Now, we have playoff hockey and basketball. The NFL also just started back up last weekend, and baseball is in full swing. College football is now starting and the Big Ten conference is rejoining the fray.

While sports betting is slowly becoming legalized in a number of states, the fact that it’s happening at all is a major win for DraftKings stock. Overall, 21 states have legalized sports betting, 14 of which are now approved for online. Of those 14, nine states are currently live, seven of which DraftKings is live in as well. Now, almost just as many states (19) have active mobile legislation on the table.

So, will all 50 states immediately green-light online sports gambling? No. Like cannabis, though, we are moving in the right direction — and eventually, DraftKings will be able to capitalize. In turn, this provides both short- and long-term catalysts as states join the list of online sports gambling over time.

Beyond that, hall-of-fame NBA star Michael Jordan joined the board as a special advisor and as an investor. That said, Jordan brings legitimacy to the business, and both his brand and guidance should help as well.

Collectively, all of these things combine to make DraftKings stock quite attractive moving forward.

Why DraftKings Stock Is a Buy on a Dip

For what it’s worth, the analysts love the recent move with ESPN. In fact, Oppenheimer and Jefferies upped their price target to $55. Benchmark increased its price target to $57, while Evercore and Craig-Hallum each assigned a $60 target. 

Furthermore, the company has growth. On Aug. 14, DraftKings reported that sales grew 23.6% year-over-year. With that in mind, this was for the April, May and June period. So at a time when sports were at a near standstill, DraftKings still found a way to grow significantly. 

Admittedly, though, some of that was driven with an acquisition (SBTech). On a pro forma basis, sales did slip about 9.6% year-over-year for those three months. Still, sales grew for the first six months of the year on a pro forma basis, which is promising. 

Moreover, making estimates for fiscal 2021 is a tough business, but a consensus expectation is out there — and it’s good. Analysts expect sales to grow more than 40% in 2021 and top $750 million

That figure could prove conservative should DraftKings continue to make some of the impressive moves that it has made in the last month. That’s also as analysts haven’t yet had time to factor in the new ESPN deal. Finally, it could prove conservative simply because more states are legalizing sports betting and as Q1 and Q2 should have a powerful comparable in 2021 given the lockdown effects of 2020. 

Overall, here’s the bottom line: DraftKings stock has relative strength on the charts and solid growth prospects moving forward. The sports world is getting back in full swing, DraftKings has momentum on various fronts and the financials are solid. In fact, it has $1.2 billion in cash and no debt

But despite all that, this stock isn’t cheap. With a $19.7 billion market capitalization and expectations for just over $500 million in sales this year, DraftKings stock is a little pricey. It’s not yet profitable or cash flow positive, either.

As a result, let’s wait for a pullback — then pounce. 

On the date of publication, Matt McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article had a long position in DKNG and DIS.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.

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