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Sunday, February 5, 2023

Inflated DraftKings Stock Is Not a Smart Bet Right Now

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Looking strictly at the numbers, DraftKings (NASDAQ:DKNG) is one of the most successful stocks of 2020. DraftKings stock is up more than 200% so far this year, even factoring in a recent pullback.

DraftKings logo on a phone

Source: Lori Butcher / Shutterstock.com

Much of the optimism about DraftKings, of course, revolves around professional and college sports. After a spring without baseball, hockey and basketball, sports fans are absolutely “jonesing” for a sports fix.

Betting on sports is growing ever more popular, so I get why there’s an interest in DraftKings these days. But I’m not convinced that the risk is worth the reward.

Are We Really Going to Have Sports?

I think there’s too much blind optimism – and not enough reality – baked into DraftKings’ 2020 surge.

Major League Baseball just released its abbreviated, 60-game regular season schedule. The National Basketball Association is preparing to finish its regular season in Orlando before starting its playoffs. People are already looking forward to college football and the NFL,which will hopefully start up again this fall.

But all of those plans are speculative at best, thanks to the novel coronavirus. Baseball players are pushing back, hard, against playing this season, and some of MLB’s top stars have already opted out because they aren’t willing to take the risk of playing during a pandemic.

Some NBA teams are already shutting down practice facilities as players and staff test positive for Covid-19, and that’s before teams all assemble in Orlando for actual games.

While many countries succeeded in flattening the curve and getting the virus under control, the number of daily cases in the U.S. is continuing to increase. States that reopened prematurely are now imposing new restrictions in a belated attempt to get things under control.

I’m not convinced that professional or college sports will go off as planned this summer or fall. And if sports leagues are forced to roll back their reopening plans, the enthusiasm baked into DKNG stock will pop like the proverbial balloon.

That’s already happened to some extent; DraftKings stock fell by 25% in the week of June 26 as Covid-19 fears continued to rise.

The Bull Case for DraftKings Stock

The one thing that DraftKings has going for it is people’s love of gambling. Sports betting is more than a hobby for some people – it’s a way of life.

More than 20 U.S. states have legalized gambling, with sports betting making up a big percentage of that pie. In 2019, Americans spent more than $11 billion on sports wagers, with licensed bookmakers making more than $750 million.

Sports gambling revenues are expected to reach $155 billion by 2024.

InvestorPlace columnist Chris Tyler argues – convincingly – that DraftKings has an enviable position in the online gambling space.

DraftKings has a partnership with the NFL and maintains a huge base of customers playing in Daily Fantasy Sports leagues across 43 states in the U.S. Those opportunities should come in handy as states begin rolling out the red carpet for legalized sports betting in the months and years ahead. At a market cap nearing $12 billion and an eyewatering price multiple of almost 700, DKNG may seem expensive. But like any company at the forefront of a secular growth market, shares are priced accordingly.

The company has competition in the form of rival FanDuel, which merged with Irish bookmaker Paddy Power and rebranded itself as Flutter Entertainment (OTCMKTS:PDYPY).

Penn National Gaming (NASDAQ:PENN) will be a huge player in the online gambling space, particularly now that it has a partnership and equity stake in Barstool Sports. Barstool, which has 66 million monthly unique viewers on its platform, will promote Penn’s products and casinos for 40 years.

There’s no doubt that DraftKings will be a major power in the sector, but it’s not as if the company will corner the sports-betting market.

The Bottom Line on DraftKings Stock

I’m a huge sports fan, and I hope that professional sports come back this fall. But I’m not optimistic. The U.S. hasn’t done a good job of getting the coronavirus under control, and there are far too many people flouting guidance from health professionals about the need to social distance and wear masks.

As long as people refuse to be responsible during the Covid-19 pandemic, the notion of professional sports leagues being able to complete a shortened season or a playoff run seems unlikely at best.

DraftKings stock had a great 2020 so far, but there’s far too much blind optimism baked into the shares at this point for my liking. Take your profits now.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.

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