Forget College Football and Buy DraftKings Stock Anyway

What a difference one month makes. 30 days ago, the forecast for DraftKings (NASDAQ:DKNG) was looking like a bad poker hand. But putting aside the very real possibility that there will be no college football in 2020, DKNG stock looks like a buy.

Since going public in 2019, DKNG stock has climbed over 260%. And in mid-July it the stock dropped nearly 20% as investors began to separate facts from fiction. At that time, there was no guarantee that any of the major sports would successfully launch. And investors knew that there was no way that the company’s online gaming sites would make up for the revenue of a sportsbook.

But the landscape has changed. The National Basketball Association (NBA) is back. And so are the National Hockey League (NHL) and Major League Baseball (MLB). This means that the sportsbooks are open, and fantasy leagues are in full swing. Those are two important revenue streams for DraftKings.

As a result, the stock has made up most of its 20% loss in the last week on expectations of a positive earnings report.

Should investors be concerned about the company’s recent IPO?

Investors were also starting to digest the consequences of the company’s belated IPO offering. As you might remember, DraftKings didn’t go public through a traditional initial public offering. In June however, DraftKings announced the company and select shareholders were selling a combined 40 million shares of class A common stock.

Both offerings were priced at $40 per share making the total offering size $1.6 billion. DraftKings said it would be using the equity for “general corporate purposes.”

Investors will want to hear more about that, particularly because DraftKings has 35 million warrants outstanding from the merger that brought them into existence. Those warrants work similar to call options and could be exercised to acquire stock.  But that’s not where the story ends.

Those warrants convert into an additional 16.3 million additional shares which will hit the market later this year. SBTech (one of the company’s from the merger) has a potential claim on 6 million additional shares if the company reaches certain agreed upon performance milestones. The company has also set aside 13.1 million shares to for employee stock compensation.

All in all, I’d say this isn’t anything to be that concerned about. The secondary share offering does make it difficult to give the company a proper valuation, but it shouldn’t affect things as long as the company has revenue coming through the door.

Should investors be concerned about more competition?

One of the biggest ways the novel coronavirus hurt DKNG stock was the way it gave time for competitors to enter the field. Prior to the shutdown, MGM Resorts International (NYSE:MGM) was just introducing its BetMGM app. Penn Gaming (NASDAQ:PENN) will also be a competitor as it has a stake in the Barstool Sportsbook app. And an even bigger threat may come from the city of New York which is gearing up to expand legalized gambling. That would make a key market for DraftKings much more crowded.

On this one, I say you have to take a wait-and-see approach. But DraftKings should be able to hold its own, particularly with a first-mover advantage.

The elephant in the room is the National Football League

Although DraftKings is a pure play in online sports betting, it’s not the only player. And that’s the thing about the absence of college football. It will affect all the company’s equally. Once again, a month ago the landscape looked a lot different than it does today.

But although the same could be said of the National Football League (NFL), it’s not an understatement to say a sports betting site without the NFL will suffer a revenue shock. The league is simply so large and it has so much activity not only with sports books but with fantasy football that it would be impossible to ignore the impact it would have to the company’s income.

DraftKings stock is a buy

Investors will want to hear about the company’s user engagement numbers and user growth as live sports have reopened. In its prior earnings report, DraftKings reported 720,000 unique monthly users.

And of course analysts will be asking about the company’s plans to deal with any potential shutdown due to the Covid-19 pandemic. But considering where the company was coming from, the forecast should be much more encouraging.  And when it comes to a stock that relies on live sports, the return of live sports is the best reason to buy.

DraftKings has a 12-month price target of $44.33 which means investors have not missed the rally on this stock.