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Why DraftKings May Not Be a Buy Right Now

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DraftKings (NASDAQ:DKNG) has been on fire, with the charts showing a 300% rally from the March low to the current high. Given such a move, it only makes sense that DraftKings stock cools off a bit, now down almost 30% from the highs.

DraftKings logo on a phone

Source: Lori Butcher / Shutterstock.com

Interestingly, the stock has been on the move even as the sports world has been on hold. For a company that primarily operates in the sports and gaming industry, one may be pretty surprised to see such a big rally in the stock. I like to think of online sports betting sort of like retail.

Transforming an Industry

Back in the day, if you wanted to buy Christmas gifts or a birthday present, you had to go to the store. Or order from a catalog. But now people just hop on Amazon (NASDAQ:AMZN) or some other platform and have access right at their fingertips.

Sports betting is still similar to the old-fashioned way. Assuming it’s legal in one’s respective state – which it probably isn’t at this point – a prospective gambler often has to go to the sportsbook to place their wager.

The online world is making that much, much easier. Like doing anything else online, many companies are adapting to this easier interface. FanDuel, MGM Resorts (NYSE:MGM) and others are taking this approach when and where possible, and DraftKings is no different.

Something that’s often overlooked about retail’s shift toward e-commerce though, is that online businesses can often react more quickly to change; they can adapt. For example, Amazon found opportunities in the cloud and advertising, two of its largest business units.

For DraftKings, sports are a key component to the business. However, it too can adapt. From its earnings presentation, “DKNG has quickly created new content to keep players engaged during COVID.”

The company has launched different league types, online games and various other ways to engage with customers. This is opposed to simply waiting for the MLB, NBA and NHL to return to action.

Breaking Down DraftKings Stock

One of the big issues with DraftKings stock is the company’s stalled revenue. It doesn’t help that it isn’t profitable, either.

As it pertains to sluggish revenue though, there’s not a lot that the company can do. It’s not like it chose to shut down the sports world. Even with it closed though, analysts expect sales of about $500 million this year. With many leagues on the cusp of starting up again, DraftKings should be in a position to see a boost in sales.

Next year’s estimates call for revenue of just over $750 million, good for about 51% growth year-over-year. There is a possibility that this estimate is a bit conservative, given what should be a huge beat on the comps in Q1 and Q2 next year.

While profit would be nice, the company is in a good position overall. It has more than $450 million in cash on its balance sheet and no debt. The company can continue to absorb a monthly cash outflow of $10 million to $15 million with no major sports in motion, it says. Once they are in motion, then it’s thought that this cash burn will subside.

The other big issue here is valuation. At its peak last month, DraftKings stock commanded a market cap of about $13 billion. That’s roughly 26 times this year’s revenue estimates.

With the latest pullback, DKNG stock has a market cap of about $10.8 billion, or about 21.5 times this year’s revenue. Based on 2021 estimates, shares trade at about 14.4 times sales. That’s more palatable but still not cheap necessarily.

Charts for DKNG Stock

Daily chart of DraftKings stock.
Click to Enlarge

Source: Chart courtesy of StockCharts.com

I would love for a dip into the $18 to $20 area. Short of a larger market-wide correction though, I don’t know if we’ll get there. If we do – down about 30% from current levels – it will leave DraftKings stock trading at about 10 times 2021 revenue estimates. I would certainly be interested at that point.

After a decent bounce from the 50-day moving average, DraftKings lost that mark on July 7th. If it’s quickly reclaimed, I want to see if it can also reclaim $35. This mark saw support in June, but resistance recently.

With shares closing below the June low, it has me looking at the $27.70 level, which is the 50% retracement and a notable level from May.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

The post Why DraftKings May Not Be a Buy Right Now appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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