DraftKings stock (NASDAQ: DKNG) recently took a tumble, falling by as much as 11.4% in morning trading a few weeks ago, as the Dow Jones Industrial Average fell by more than 800 points, or around 3%, at the open.
What’s the Big Deal About DraftKings Stock?
The price of DraftKings stock has quintupled since the sports betting company’s initial public offering late last year. DraftKings shares recently hit an all-time high of $55.70 as major league sports returned after months of coronavirus closures. The return of big sports had fans eager to bet on their favorite teams, thus boosting expectations for companies like DraftKings. In fact, New Jersey reported the biggest jump in sports betting this August, raking in more than any state for sports betting.
DraftKings has three main sources of revenue; sports betting, daily fantasy sports, and online casino gaming. While these three segments of DraftKing’s business are legally in different areas, with differing regulatory requirements and profit margins, all three sectors are expected to boom.
In addition to its gambling revenue, DraftKings also sells advertising on its platform. The company also offers a variety of incentives to customers, such as a loyalty program, to reduce its revenue; these costs are seasonal.
State Legalization of Sports Betting Key to DraftKing’s Growth
Ever since the Supreme Court has allowed nationwide sports betting in 2018, 21 states and Washington, D.C. have legalized it; however, only nine states have their sports betting markets up and running.
DraftKings estimates that the total US market for legal online sports betting could eventually reach $18 billion to $23 billion annually, as more states legalize retail and online sports betting, as well as online casinos.
Currently, online casino gaming is legal in just four states, New Jersey, Nevada, Pennsylvania, and West Virginia. Unfortunately, DraftKings doesn’t think that more states will legalize online casinos any time soon. Also, online casino regulations are more complex. For example, in Nevada, online poker is the only type of online casino gambling allowed, but in Delaware, online casino gambling is legal, but not sports betting.
What Now for DraftKings Stock?
The online sportsbook has come very far, very fast, in a very short amount of time. So it’s not surprising that DraftKings’ stock is falling due to market weakness. Many investors are likely banking their DraftKings profits now, which could account for DraftKings stock falling more sharply than the indexes.
Yet DraftKing’s future holds quite a lot of potential. For example, Pennsylvania recently reported its biggest sports betting take since it was legalized. Also, DraftKings recently signed a deal to become the exclusive sports betting partner for the NFL’s New York Giants. New Jersey’s close proximity to the wildly popular New York sports franchises that have helped make the Garden State the country’s sports betting capital. DraftKings also penned an impressive deal recently with sports media giant, ESPN.
Despite the ups and downs, financial analysts think that betting on DraftKings stock will pay off. In fact, Needham analyst Brad Erickson says, “We believe that DraftKings has a leading brand with target-rich contacts related to its market-leading sports betting business. DKNG is going after a product and experience-first approach that we think will be the primary determiner of success in the sports betting and daily fantasy space. Also, the company actively employs a data-centric approach to acquiring customers. DraftKings also has both operational and capital advantages compared to its competitors.”
Erickson believes that DraftKings will easily acquire new customers as more states legalize sports betting. This is something that will resonate with investors, as well as the company’s runaway growth, robust market share in states with legal sports betting, and finally, the company’s leading platform technology.
While the frequent ups and downs of DraftKings stock might be disconcerting to some investors, the long term potential should not be overlooked.