Should I Buy DraftKings Stock?

Sports betting was legalized at a federal level in 2018 and at the most recent count, 25 states have some form of it permitted. The legalization has shone a spotlight on the burgeoning online gambling industry, and one public company has been getting some significant attention from investors and posting impressive gains, but should you buy DraftKings (NASDAQ:DKNG) stock?

In case you missed it: 

• DraftKings Competitors: The Other Players In The Online Betting Space
• Is Penn National Gaming A Good Buy?

With this new opportunity comes a diverse field of competitors arising to stake their claim for the growing market. It comprises of long-established casino companies like Penn National Gaming, which is going through a digital transformation thanks to its stake in cultural phenomenon Barstool Sports, European stalwarts like Flutter Entertainment which owns FanDuel, and even technology companies like GameAccount Network, which describes itself as a turnkey online casino solution. 

The Bull Case for DraftKings

DraftKings is at the head of a nascent industry that is looking set to grow significantly. Some obvious immediate opportunities for the business include more states legalizing sports betting as we saw during the 2020 presidential election last year. CEO Jason Robins has called the company's "No. 1 focus from a product perspective." Robins made the comparison to the U.K., stating that "in-game is about 75% of the revenues at sportsbooks" and "you can bet on almost anything" in an English Premier League game. 

The U.K. comparison is an interesting one because it outlines the potential of the new sports gambling industry in the U.S. Sports and gambling are intrinsically linked on this side of the pond. For better or worse, there is a strong culture of sports betting, especially amongst young males. If the same culture were to be cultivated in the U.S., with a year-round sports calendar at its disposal, the upside for DraftKings could be immense. 

Its Q1 earnings report was also an absolute win. The firm blew expectations out of the water, reporting revenue of $312 million, representing 175% year-over-year growth. The company is now guiding investors to look for revenue in the range of $1.1 billion at the midpoint. That's up 16% from the previous guidance of $950 million at the midpoint. It also confirmed the availability of its products in 12 states across the U.S.

Perhaps one of the most attractive aspects of investing in DraftKings is that it's a pure-play for online betting in the U.S. While its competitors provide online sportsbooks, an investment in Penn would also encapsulate buying into over 40 casinos across North America, while purchasing Flutter stock also means owning a stake in more than 600 traditional betting shops across the U.K. and Ireland as well as an online poker business. DraftKings is leaner, more scalable, and has one sole focus which investors will find enticing.

The Bear Case for DraftKings

The valuation of DraftKings and the hype surrounding the stock should be a concern for potential investors. It is now the second-biggest U.S. gambling company by market cap at $20 billion+.

This growth story is coming at a seriously high premium, affected in no small part by its pure-play status. While being a pure-play is inherently a good thing, the ensuing stock behavior of wild swings and unsustainable valuations could lead to a few sleepless nights for investors. 

The company also has a lot riding on the gambling industry, which is often frowned upon by more ethical investors. With younger retail investors moving more and more towards ESG (Environmental, Social, & Governance), this could see DraftKings fall from their line of interests. What's more, in June 2021, YouTube banned the advertisement of gambling companies on its banner headline spaces, evidencing this ESG preference.

What's more, it has often been described as a 'meme' stock, which comes with its own issues.

What is a meme stock?

So, should I buy DraftKings stock?

DraftKings is in an enviable place in the industry. It has a well-established brand, a growing customer base, dozens of potential U.S. states it can move into, high insider ownership, and a good balance sheet with $2.8 billion in cash and marginal debt on the books. CEO Jason Robins has outlined clear goals for the business moving forward, including a path to $1 billion in annual earnings in 2021. 

The way the company has used its dominant position in daily fantasy sports to gain an upper hand in the online sports gambling industry shows strong business acumen from its management, and I'm also impressed by the resilience of the company in a time when there was no live sport at the peak of lockdown. Offering markets on esports and ping-pong indicates a level of ingenuity and pragmatism from the business, as well as a clear demand from customers.  

I have high hopes for this company and think it's in a prime position to take control of the online sports betting industry as more and more states begin to legalize it.

This is why it was recently added to the MyWallSt shortlist, joining the ranks of our market-beating collection of stocks. Want to find even more promising growth stock alternatives to DraftKings? Click here to check out MyWallSt and get free access today. 

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