When professional football started back up, it was safe to say DraftKings (NASDAQ:DKNG) was too hot to touch. In September through the start of October, DraftKings stock rallied like a champ, going from under $40 per share to over $60 per share in a matter of weeks.
But now, this sports-betting play has fallen back toward earth. And, to some extent, that’s no surprise. Between a frothy valuation, a dilutive capital raise and the specter of insider selling, there are a lot of factors driving the recent declines.
Sports betting isn’t going anywhere. In fact, as more states legalize online sportsbooks, this company’s total addressable market continues to grow.
For months, my call on this stock has been “wait for a pullback.”
Now that said pullback has finally emerged, it’s time to pounce. Today’s hammered-down share price gives you a solid long-term entry point.
DraftKings Stock and Near-Term Hiccups
As mentioned above, you can chalk up this stock’s recent decline to multiple factors. Firstly, valuation concerns. Wall Street was chomping at the bit to buy anything with exposure to the sportsbook legalization trend. Especially pure plays like this one.
But, that meant shares became “priced for perfection.” Sure, a growth premium is warranted, given its long-term prospects (more below). Yet, with much of its growth in the coming years priced in, there wasn’t much room for further gains when shares traded near their highs.
Secondly, an equity raise, along with the end of the lock-up period, put more pressure on DraftKings stock. Yes, it’s good the company was able to raise more capital, but it’s still dilutive. That being said, the lock-up expiration is the larger issue here.
Why? With the lock-up over, insiders are now free to unload their shares. And with the stock’s strong performance, insiders may be ready to take profit. In anticipation of a potential insider exodus, investors sold the stock.
Thirdly, Covid-19 headwinds. Shares have also headed lower due to reports of NFL players contracting the virus. While this hasn’t caused a mass cancellation of NFL games, the risk of the virus getting worse as we enter the winter has some concerned we could see another round of sports cancellations.
Yet, despite this grab bag of short-term concerns, the long-term bull case for DKNG stock remains in motion. Sports may be weathering the pandemic storm like the rest of us, but sports, and, in turn, sports betting, isn’t going away. In fact, as states rush to legalize it, this company’s growth remains fully on track.
Long-Term Trends Remain in Motion
As I said earlier this month, DraftKings’ prospects in the coming decade remain bright. Sales are expected to soar from $535 million this year to as high as $4.3 billion by 2030. And, with the company’s rock-solid balance sheet (over $1.2 billion in cash, no debt), there’s plenty of dry powder in its war chest to fuel this epic growth.
Granted, a more than eight-fold increase in revenue in a decade sounds far-fetched at first glance, but all the ingredients are there for this to come to fruition. In fact, the pandemic may help to accelerate the legalization wave.
So far, 18 states have legalized online sportsbooks. But, with many major states (like New York and California) hit hard financially by Covid-19, the need for more cash in their respective coffers may help to speed up legislation.
Like with other major changes, things are going from happening slowly, to all at once. It took years to lift the federal ban that limited sports wagering to Nevada and a handful of grandfathered-in states. But now, with the fetters removed, it’s off to the races.
And with technology not only expanding the wagering menu (via innovations like in-game betting), but also reducing overhead costs, there’s big potential for high margins.
In short, there is plenty of room for this first-mover to meet its ambitious growth goals and scale into a cash cow. And that bodes well for DraftKings stock in the long term.
Seize Opportunity Now, and Buy This Pullback
Despite the short-term hiccups, the sports-betting megatrend isn’t going away. But the pullback in DraftKings shares could be fleeting. While there’s much to justify the recent declines, improvements just around the corner could push shares back near where they were just a few weeks ago.
So, what does this mean? Strike while the iron is hot, and enter a long-term position in DraftKings stock on the pullback.
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Source: Investor Place