Optimism about the growth of sports betting in the US has propelled DraftKings stock significantly higher over the past several months.
For obvious reasons, sports betting companies are a hot trend for investors. The industry is poised for fantastic growth as more U.S. states search for ways to resolve the financial problems caused by the COVID-19 shutdowns.
However, with DraftKings stock up 70% just this year, investors may want to place it on their watch list to purchase on a pullback instead of pursuing this rally.
But without a doubt, DraftKings looks like a great long-term bet for investors. The point is, near-term uncertainty and quick ascension to all-time highs over mere weeks could mean investors should give the stock time to settle. That’s especially true with all of the volatility in the market right now.
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Why DraftKings Stock Should be Considered
DraftKings (NASDAQ:DKNG) is ideally positioned to take advantage of the pent-up demand for sports betting. In New Jersey, a prime market for sports gambling in the U.S., sports betting revenue climbed in June despite the lack of major league sports. That fact suggests that sports fans are eager to wholeheartedly resume betting on sports. To put it simply, it’s only a matter of time before the sports betting industry is back in full swing.
DraftKings’ niche, online sports betting, is expected to do even better. Right now, less than half of the states allow online sports betting. Furthermore, many states require that bettors visit a casino to place their bets. However, that will change over the coming year as state governments look for ways to fix their budgets, following the COVID-19 shutdowns.
As more states relax restrictions on gambling, online sports betting is quickly becoming an $18 billion market that can be taxed.
DraftKings Needs to Cool Down
DraftKings stock has tremendous long-term potential. But the stock has been highlighted just when traders are looking for ways to leverage the stock market’s uncertainty. The pandemic shutdowns inflated DraftKings value significantly.
It’s possible that the recent decline for DraftKings stock will result in a pullback. That’s especially true if pro sports remain shut down due to Covid-19 restrictions. With the NBA starting its season, many are hopeful professional sports will fully return.
As new Covid-19 cases erupt in Australia, triggering the government to impose even heavier restrictions, investors should be wary that a winter wave in the US is still entirely possible. Also, if anyone within the NBA tests positive, the league may postpone or cancel games.
There Are Risks in the Coming Months
Despite the near-term risk of more coronavirus shutdowns, DraftKings stock is trading at 651X its earnings. That means investors are betting that DraftKings will dominate the online sports betting industry once the world returns to normal. But the fact is, DraftKings won’t simply dominate all sports betting companies.
DraftKings is competing against big, established names such as Las Vegas Sands (NYSE:LVS) which also operates land-based casinos. DraftKings is also competing against hybrid companies like Penn National (NASDAQ:PENN) that owns both casino properties and online gambling websites. Moreover, international bookmakers like William Hill (OTCMKTS:WIMHY) present serious competition, considering their wide reach in Europe where the sports gambling market is much more developed.
To top it off, when investors bet on DraftKings, they’re betting on a stock that needs gambling legislation to grow. While it’s expected that online gambling laws will relax, when it comes to bureaucracy, nothing is guaranteed. At best, further legalization of sports betting it will be a slow process. And, it might not even happen in some states.
Finally, there’s the threat of a looming recession, which is always bad for consumer discretionary stocks. No one can predict the direction of the economy until the world has returned to normal, following the coronavirus pandemic. High unemployment could linger, leaving little discretionary income to gamble.
The Final Word
While DraftKings absolutely should be on investors’ lists, since the trend towards online gambling is worth following. Draft Kings’ stock is absolutely a major player within that sector. But rather than jumping in wholeheartedly, investors could wait for a pullback. That’s especially true considering the future of professional sports remains uncertain.
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