In Focus: DraftKings
Updated: Jun 27, 2021
Every once in a while the stock market hands regular investors a gift, and this gift is a result of the big firms on Wall Street moving money frantically out of one position into another in order to make their quarterly numbers.
In 2018 we took advantage of this gift by investing in Apple (AAPL). The stock sold off in the last quarter of 2018 dropping 35% from its October 2018 high. After bottoming out in January 2019, Apple went on to increase by over 200%.
In the summer of 2019 we got another gift with a sell off in Tesla (TSLA), which caused the stock price to drop by over 50%. Since hitting that June 2019 bottom, Tesla's stock has gone on to gain over 1,500%.
Today Wall Street is providing regular investors with another gift, and this time it's with DraftKings (DKNG). After trading to an all-time high of $71.52 in March 2021, the stock has lost more than 35% of its value as of this writing. The most surprising thing about the pull back is that things have never been better for the company.
For the quarter ending March 2021, DraftKings reported $312 million in revenue, which marked a 252% year-over-year increase. DraftKing's Q1 revenue even surpassed Wall Street estimates by $75 million.
The company's ability to attract new users is fueling its revenue growth. DraftKings' Monthly Unique Payers (MUP) for its B2C segment increased 114% year-over-year; and Average Revenue per MUP came in at $61 during the quarter, which represents a 48% increase year-over-year.
Betting, and specifically sports betting, has always been a hot topic in the U.S. but it appears the country is changing its conservative stance on the issue, resulting in markets continuing to open up for DraftKings.
In 2018 when the U.S. Supreme Court lifted the federal ban on sports betting, only 11 states had legalized betting on sports after the ban was lifted. By the summer of 2020 that number grew to19 states that had legalized sports betting, with 4 other states passing bills related to sports betting, and active bills in 9 other states. The momentum appears to be on DraftKings' side, but not everyone thinks so, kind of.
Morgan Stanley analyst Thomas Allen downgraded DraftKings, and points to DraftKings' widening EBITDA losses, and its need to issue more stock to stay operational, which will dilute the position of current shareholders. Another downgrade came from Needham analyst Bernie McTernan, who also pointed to the widening EBITDA losses. McTernan's belief that investors are currently favoring value stocks over growth stocks also played a part in his downgrade.
There is a concern that DraftKing is spending too much on customer acquisition, which will prevent it from turning a profit for at least another couple of years. DraftKings reported a $346 million
loss in Q1 2021.
There's also the competition from the likes of Penn National Gaming (PENN) Penn National's deal with Barstool Sports gives Penn something that DraftKing lacks and that is an active face for the brand. Barstool Sports founder David Portnoy can be found everywhere promoting himself and his brand, and in a society that loves making regular men and women into deities, Portnoy's presence is big.
The silver lining for investors considering DraftKings is that the downgrades by the two major Wall Street firms are still higher than the current share price. Allen from Morgan Stanley has a $66 target on the stock, while McTernan of Needham has a $73 price target. In addition to those two estimates, rock star investor Cathie Wood added more than half-a-million shares of DraftKings to her ARK Next Generation Internet ETF (ARKW).
The last time I wrote about DraftKings was last summer. In the post I explained that we would see more states embrace sports gambling and recreational marijuana in an effort to refill their coffers that were ravaged by the coronavirus. Shortly after the article DraftKings' stock went on a run from ~$36 per share to ~$63 per share in a little over a month. I fancy myself a long-term investor, but I'll take 75% on my money in a month if I can get it.
The future seems far too bright for DraftKings for its stock to be lingering below its 200 day moving average like it is. A part of me wonders if DraftKings' stock is a part of a Wall Street operation. If you don't know what that is, it's when big Wall Street firms tell the public how bad a company is, causing investors to sell their stock which then allows the big firms to swoop in and buy the stock at a cheaper price. Again, there's a lot going on for DraftKings, and even though it's not profitable, I've seen Wall Street firms bid up stocks with less prospects than DraftKings.
In any case at the current price DraftKings is a gift. The NBA and NHL are currently in their playoff seasons, and earlier in the year DraftKings became one of the NFL's official sportsbook partners. In a few years DraftKings will be a money printing machine, and investors can get in now while the company works towards that. Accept the gift that is DraftKings.