In 2020, DraftKings (NASDAQ:DKNG) stock rose a sizzling 335%. So far in 2021, DKNG has gained another 21% — though that includes the recent sell-off from last month’s highs.
The softer performance this year doesn’t seem to make much sense. After all, major sports shut down last year amid the novel coronavirus pandemic. At one point, the platform’s most popular sport was Ukrainian table tennis.
Major sports have since returned, leading to big-time growth in DraftKings revenue. But DKNG stock actually has suffered.
Shares still are below early October highs. Over that stretch, the S&P 500 has rallied about 20%.
At least as far as 2020 goes, the rally made more sense than it might have appeared given the short-term headwinds. Investors correctly took the long view.
Yet here in 2021, the market seems to have forgotten that 2020 case. The irony is that precisely the same case is playing out again. Yet investors don’t seem nearly as excited.
I expect that will change in short order, at which point DKNG will resume its rally.
The Pandemic Boost
There’s a simple reason why DKNG and other sports betting stocks rallied in 2020. The short-term hit from canceled and postponed seasons was more than outweighed by the improved long-term outlook.
As was expected, the pandemic has blown a hole in state government budgets. In fact, there was a “double whammy” effect. Tax revenues went down as retail stores and restaurants closed and other businesses pulled back. Meanwhile, costs rose as the pandemic drove higher spending in a number of areas.
States need revenue. And sports betting taxes are a logical source of that revenue.
That’s why DKNG stock and other sports betting names rose in 2020: investors believed the pandemic would lead to faster, broader legalization. That’s exactly what is happening.
In multiple states, voters passed referendums legalizing sports betting in November. Arizona came on board last week. And now New York, the country’s fourth-most populous state, is launching mobile wagering.
More no doubt are on the way. Some states won’t want to see revenues head to neighboring jurisdictions. Others, like California, need to work through a nest of competing interests. Just from what we’ve seen so far, the 2020 case for DKNG stock looks like it was on point.
DKNG Stock Pulls Back
And yet DKNG stock has faded over the past month. It’s difficult to see why.
Skeptics could point to valuation. DKNG stock hardly is cheap: it trades at more than 30x 2020 revenue. Profits are likely a couple of years away.
But DKNG shouldn’t be cheap. And it shouldn’t be profitable, either.
What’s happening now is a “land grab” for users. DraftKings is using aggressive upfront promotions to capture customers that will be profitable over the long haul.
That’s a logical strategy. It’s a strategy that many other growth companies in many other markets have followed successfully in recent years. Look at software or e-commerce: most of the biggest winners in those sectors had skeptics hollering about valuation all the way up.
That’s because valuation isn’t based on a metric or two in a given way. It’s about the long term.
And DraftKings’ long-term opportunity is as good as anyone. It still has plenty of growth in existing markets as users come on board. New states will follow.
Don’t forget that DraftKings has a solid iGaming business where that is available: it has solid market share in New Jersey, for instance. There’s even room for international expansion over time, as DraftKings has offices in Europe as well.
Take the Long View
So what we have here is a company with one of the better growth opportunities in the entire market. And we have a stock that’s pulled back substantially from its highs.
That’s a powerful and attractive combination.
Moreover, it’s not as if there’s any bad news driving the pullback. It was fourth quarter earnings that helped drive the rally to last month’s highs, thanks in part to raised guidance for this year. News on the political front looks positive. DraftKings was even named an official partner of the National Football League, the biggest league for U.S. gambling.
The story is the same as it was when DKNG was rallying last month and last year. Investors now can own that story at a cheaper price.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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