DraftKings (NASDAQ: DKNG) has been on fire over the past month, with DraftKings stock rising more than 50% during that stretch thanks to a wave of favorable business developments, the most noteworthy of which is an exclusive Daily Fantasy Sports partnership with ESPN.
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Before this huge breakout in DraftKings stock, I said that the stock was a screaming buy, because of the company’s long-term upside potential in online sports betting, iGaming and Daily Fantasy Sports.
Visibility to DraftKings realizing that long-term upside potential has increased dramatically over the past month. But so has the DKNG stock price.
And so, it is with some sadness that I say it may be time to do some profit-taking on DraftKings stock. The stock is fundamentally and technically overextended here, and due for a pullback in the coming weeks.
Sell today. Buy on that pullback.
Here’s a deeper look.
DraftKings is a Long-Term Winner
Online sports gambling is a megatrend which represents one of the market’s best investment opportunities over the next five to 10 years.
The big picture here is pretty simple.
Consumers love to gamble. Global gambling revenues measured about $450 billion in 2019. All of that gambling demand is shifting to the online channel, with share of total gambling revenues transacted digitally rising from 9.5% in 2015 to 12.2% in 2019. Legislation is pivoting to accommodate this shifting demand, with 14 states having legalized online sports betting to-date, representing 24% of the U.S. population.
Both of those numbers (digital penetration in the gambling market and the number of states with legal online sports betting) have been growing exponentially ever since the U.S. Supreme Court overturned the federal ban on sports betting in May 2018. They will only continue to grow exponentially over the next several years.
As they do, we will enter a new world wherein online sports betting, iGaming and Daily Fantasy Sports are legal and commonplace across the entire country.
DraftKings will be at the epicenter of this new industry, because the platform has huge branding, distribution, awareness, data, size and convenience advantages. Such advantages ensure that DraftKings’ early leadership in the online sports gambling space will persist for the foreseeable future, as the market explodes higher.
To that end, DKNG stock is without a doubt a long-term winner.
Tons of Momentum
There’s also no question that DraftKings has a ton of momentum today, and is only increasing visibility towards significant long-term revenue and profit growth.
The company is signing big-time partnerships left and right, the most noteworthy of which is a deal with ESPN wherein DraftKings will be the exclusive Daily Fantasy Sports provider for ESPN. That’s a huge deal because ESPN is the No. 1 sports website in the world, with an estimated 400 million visitors last month. In essence, the deal secures DraftKings as the DFS leader for the next several years.
At the same time, sports are back. The NBA playoffs are ongoing. The NFL restarted. MLB is on. Tennis is on. Golf is on. College football is eyeing a return. Of course, the more live sports return, the more engaged sports fan will be on live sports betting platforms like DraftKings.
All in all, then, it makes complete sense that DKNG stock has rallied 50% over the past month alone. The company is on fire, and the space has strengthening tailwinds.
DraftKings Is Fundamentally Overvalued
Although DraftKings stock is a long-term winner, it’s also fundamentally overvalued and technically overextended here.
From a valuation perspective, I’ve updated my model on DraftKings, revising my 2030 projected market share numbers higher to reflect recent partnership wins. My new numbers ($5 billion-plus in 2030 revenues and $1.3 billion in net profits) are ahead of Wall Street consensus estimates.
Still, they don’t justify the current price tag on DKNG stock.
Casino and gambling stocks tend to trade around 20x forward earnings. Based on that multiple, DraftKings is a $26 billion company in the making (20x $1.3 billion equals $26 billion). Discount that back by 8.5% per year, and you arrive at a 2020 valuation of roughly $12.5 billion, which is substantially below today’s market cap.
At the same time, DKNG stock has come very far, very fast, to a point where the Relative Strength Index is in overbought territory. Traditionally, when the RSI runs up into overbought territory, stocks tend to be due for near-term pullbacks.
Bottom Line on DraftKings Stock
DraftKings is a great company. But the best of the current rally in DKNG stock has already happened.
So, whereas I said buy the dip a month, I’m now saying sell the rally today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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