If there’s a stock perfect for the “Bro Investor” who likes risk, action, and (potentially) a big pay-off, it’s DraftKings (NASDAQ:DKNG).
DraftKings began as a fantasy sports game manager. It took advantage of the 2018 Supreme Court decision allowing the legalization of sports gambling to build an empire.
On August 12 that empire was worth $21 billion. The stock opened for trade at about $52.20 per share. Caesar’s Entertainment (NYSE:CZR), the largest physical casino operator, is worth $19.8 billion. Caesar’s had revenue of $2.5 billion in the June quarter, DraftKings about $300 million.
How can a small online sportsbook be worth more than a giant casino conglomerate?
Big Action
Since coming public in April 2020 through a SPAC called Diamond Eagle Acquisition, DKNG stock has been setting investors’ hearts a-flutter. It’s up 151%. At one point last March it traded at over $70/share.
What sent it up was the promise of big action, as DraftKings signed deals with major promoters. Major League Baseball signed on, joining the NBA. There will be a two-story DraftKings sports betting palace next to Wrigley Field in Chicago. There’s a content integration deal with Walt Disney’s (NYSE:DIS) ESPN. DraftKings also has a deal with the UFC that includes in-show advertising. Sports franchises are tying themselves to gambling because they see it as a great way to increase their value.
The latest deal is the all-stock purchase of Golden Nugget Online Gaming (NASDAQ:GNOG), another SPAC I wrote about last December. (Not favorably.) As DraftKings is following online sports betting state-by-state, Golden Nugget is doing the same with online casino gambling.
Big Risks
I wrote about the big risk in June when I advised investors to avoid DKNG stock.
It relates to DraftKing’s “origin story” as a gaming engine as opposed to an online game platform. To make that happen there was a third company involved in its SPAC deal, SBTech. At the time SBTech was described as a “technology partner” with years of experience. Given that online gambling has been illegal in most places until recently, a lot of that experience came under the table.
Before the merger, SBTech tried to clean itself up by putting the criminal element into a new entity called SBI/CoreTech. The Securities and Exchange Commission (SEC) will now investigate whether this is all a front for organized crime. DraftKings says not to worry, that there’s no suggestion of wrongdoing, that it intends to cooperate fully.
But this isn’t the Trump SEC.
Big Pay-Off?
DraftKings CEO Jason Robbins compares his company to Amazon.Com (NASDAQ:AMZN). By getting into sports betting ahead of the crowd, and by taking all the best real estate, all the risks will be worth it.
Like Amazon a decade ago, DraftKings is taking losses to fuel future growth. The company’s latest 10-Q report saw a loss of $305 million, 76 cents per share, on revenue of $297 million. The press release accompanying the 10-Q didn’t include the numbers. It said monthly users averaged 1.1 million per month.
It noted that DraftKings is now legally taking sports bets in 12 states, representing 25% of the U.S. population. It said 25 states introduced legislation to legalize sports wagering this year. It also highlighted a deal with Genius Sports to deliver live video feeds, marketing technology, and the ability to stick its logo on the highlights.
The Bottom Line
DraftKings could surge to greater heights.
It could also blow up.
Which way things go is not entirely under DraftKings’ control. The stock is fully valued, given that it still faces online competition, not least from Caesar’s, along with Penn National (NASDAQ:PENN) and Flutter Entertainment (OTCMKTS:PDYPY). If the SEC wants to make an example of DraftKings, it won’t sink the market.
Given the premium you’re paying for DraftKings and the risk inherent in the SEC investigation, I’d rather own Caesar’s. But I’m not a Bro anymore, if I ever was one. At 66, I’m more of a GrandBro.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.