With the Massive Ten and Pac-12 suspending fall soccer, buyers are beginning to fear that DraftKings (NASDAQ:DKNG) gained’t have something to guess on this fall. With such a noticeable headwind, you’ll assume DraftKings stock could be cratering.
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However it’s not. Right here’s why.
DraftKings Stock Is Down however Not Out
On Aug. 14, DKNG stock slipped nearly 6%. Whereas there have been some troubles throughout the second quarter, DraftKings reported a usually favorable consequence. I’m chalking up this decline in its share price to a “buy on rumor, sell on news” form of deal.
As I mentioned to start with, buyers are getting nervous that there gained’t be any sports activities for individuals to guess on if the soccer leagues hold suspending video games till 2021. There’s a kernel of reality to this concept. Nonetheless, let’s not overlook that baseball, soccer, hockey, golf, and basketball are all working proper now.
“The Action Network, a sports betting-focused media company, had its biggest week ever for golf and NHL picks last week, and its second-biggest week ever for the NBA,” Axios contributor Kendall Baker wrote Aug. 12.
Baker factors out that sports activities betting is at the moment authorized in 23 states should you embrace the 4 who’ve handed payments however have but to implement totally. One other 9 states have payments in movement. Additional, he reminds his readers that states beforehand lukewarm on the concept, are leaping on the bandwagon as a result of in-person playing seems to be able to take a diminished position in total future revenues.
“For most major stakeholders in the U.S., sports betting was always a 2023 or 2024 story,” Baker quotes Chris Grove, companion at Eilers & Krejcik Gaming. “So the industry appears to be shrugging off any concern about the long-term impact of COVID-19.”
And why not? Ultimately, sports activities and life will get again to regular. By then, sports activities betting can be authorized in an entire bunch of further states, placing DraftKings within the driver’s seat.
DraftKings stock would possibly take it on the chin for the subsequent seven to 10 days. In the end, regardless of dealing with the identical type of headwinds as airline stocks, it’s not in almost as a lot hassle within the close to time period.
DraftKings Has Loads of Money
Firm administration says that with out sports activities, it’s burning $15to $20 million a month in cash. In the meantime, the airways, which face a a lot steeper hill to climb, are burning between $5 million and $59 million — a day!
On the excessive finish of the every day burn charge is American Airways (NASDAQ:AAL), which is burning $1.eight billion. In the meantime, relative to its burn charge, DraftKings is sitting on a ton of cash.
“This is relative to their $1.1 billion cash balance we estimate for the end of June, indicating an over 4.5 years sports hiatus before having to raise capital,” Rosenblatt Securities analyst Bernie McTernan wrote just lately. “Assuming the potential hiatus would only be temporary, we do not believe it would impact the long term opportunity for OSB [online sports betting] in the US, meaning DKNG would still be in the early innings of a potential $18 billion market opportunity.”
It’s secure to say that one of many main airways will go bankrupt lengthy earlier than DraftKings runs out of cash. Because of this, you’ve obtained to be loopy to decide on one of many airline stocks over DKNG.
McTernan additionally believes as a result of the states are ravenous for income, the remainder of them will fall in line a lot sooner than they might have pre-Covid.
“There is momentum in the business with OSB and iGaming both surging,” McTernan mentioned. “Sports betting revenue was 30%-plus year-over-year in NJ in June despite the difficult sports calendar comparison while iGaming revenue up 123%-plus year-over-year.”
Overlook the short-term implications of no soccer, there’s lots to maintain sports activities betters busy, which is why McTernan has a purchase score and a $60 goal price.
The Backside Line
My InvestorPlace colleague, Josh Enomoto, just lately referred to as DraftKings stock a wonderful short-term commerce. He’s bearish long run due to the upcoming second wave of Covid-19.
Whereas I get his rationale, I’m somebody who focuses three to 5 years down the street, and what its enterprise goes to appear like at the moment. Josh calls DKNG a “high-conviction buy” for a short-term commerce. I take into account it a high-conviction purchase for the long run.
That mentioned, should you can choose up some stock within the $20s on a correction, I might take into account doing so.
If DraftKings fails long run, it gained’t be as a result of authorized sports activities betting by no means took off. Will probably be as a result of it was unable to execute its plan.
Will Ashworth has written about investments full-time since 2008. Publications the place he’s appeared embrace InvestorPlace, The Motley Idiot Canada, Investopedia, Kiplinger, and a number of other others in each the U.S. and Canada. He significantly enjoys creating model portfolios that stand the take a look at of time. He lives in Halifax, Nova Scotia. On the time of this writing Will Ashworth didn’t maintain a place in any of the aforementioned securities.