The Mystery Of DraftKings Stock Price Soaring While Sports Are Shut Down

Posted on June 1, 2020

DraftKings is now a $12 billion market cap company.

The share price is hovering near $40 at the time of writing, up some 270% from when the transaction officially closed. The stock traded around $17 when DraftKings first listed on Nasdaq in April.

https://twitter.com/howardlindzon/status/1266053320772329473

But of course, nothing about the business has really changed since mid-April. So what’s driven the massive uptick in valuation?

Analysts are near-unanimously bullish on DraftKings

According to Bloomberg, seven analysts have issued ratings on the stock. Six are giving some sort of buy recommendation.

The lone dissenter is Goldman Sachs, which is officially neutral on the stock. But even Goldman Sachs sound bullish.

“In our view, DKNG is well-positioned to capture outsized share of the rapidly growing US sports betting market,” the bank wrote in an initiation note. FanDuel maintains top US sports betting market share at the moment, with DraftKings right behind.

Given the relative novelty of the sports betting sector in US public markets, analyst recommendations carry an important weight.

Why are analysts hot on DK?

There is a belief that DK can protect and extend its current market share across the US thanks to its brand, database, and benefits of scale.

Analysts also echoed DraftKings CEO Jason Robins in highlighting two reasons why DraftKings could emerge stronger from the coronavirus pandemic.

Firstly, the firm might benefit from changes in leisure spend. Money that would previously have gone to casinos, concerts, and sporting events could be re-directed to online betting as people stay at home.

Secondly, states could accelerate the pace of online betting and gaming legislation. That claim appears less certain.

Private investment advisors on the same page

Former FanDuel CEO Nigel Eccles has been advising investors on the stock. His view is that the US betting market will ultimately resemble US telecoms thanks to the sheer cost of doing business.

That means a couple of profitable companies and everyone else treading water or losing money. DraftKings is well-positioned and well-capitalized to spend hundreds of millions securing market share now in order to reap the benefits later

The public is buying it too

DraftKings was the second-most added stock among Robin Hood users on Thursday and is one of the most popular stocks overall.

Retail investors might not normally affect a $12 billion company’s market cap, but there is a uniquely high volume of them at present. Three of the top US online brokerages saw almost 800,000 sign-ups in March and April.

Many of these new traders are sports bettors looking for a gamble and they are buying companies they know.

“DKNG is a recognizable name,” says one broker, who asked not to be named. “It’s the old Peter Lynch ‘buy what you know.’ That along with the fact it’s billing itself as the only pure play on sports betting, and you pave the way for it to get a tech valuation.”

Meanwhile, Robins has been appearing on CNBC and CNN talking up the business. And even the share price itself is now making news, helping attract more and more attention from investors.

Source: ZeroHedge

Big names are involved

As noted by LSR previously, Disney has a 6% stake in the business. And Bloomberg reported that George Soros, Jerry Jones and Robert Kraft were among DraftKings’ investors.

All of those luminaries were investors before the IPO of course, but the headlines generate more interest and add to the narrative of DK as a smart stock to own.

Equities as a whole are riding high

Finally, the wider stock market environment might be pumping up DraftKings a little. A lot of companies currently trade on valuations that aren’t rooted in their fundamentals.

Torsten Slok, chief economist at Deutsche Bank Securities told the Financial Times: “This rally in equities is clearly not driven by fundamentals. It’s driven by the liquidity support from the Federal Reserve.”

DraftKings might be one company benefiting from the extra $6 trillion or so the Fed has pumped into the markets.

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Brad Allen

Brad has been covering the online gambling industry in Europe and the US for more than four years, most recently as the news editor at EGR Global.

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