Analysis: Why DraftKings Stock Is Falling And What It Means For US Sports Betting

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DraftKings stock

DraftKings stock continued its recent slide on Wednesday, dropping as low as $42 in early trading.

That is down some 43% from its all-time high in late March. And the selloff has only intensified in the days since DraftKings recent Q1 results.

But are those results to blame for the dip, or is it the wider macro picture? Wall Street, as ever, has differing views.

Not just DraftKings stock getting hit 

Loop Capital analyst Daniel Adams raised his price target on $DKNG to a Street-high $105 following Friday’s results.

“The sell-off in DKNG was driven more by technical issues, not fundamentals,” Adams wrote. “To us, the key takeaway from DKNG’s 1Q is that the company delivered another ‘beat and raise’ quarter.”

Specifically, the operator delivered $312 million in revenue and raised its revenue guidance for FY2021.

Flooded ARK

To understand the downturn, then, look no further than the ARK Innovation ETF, a basket of high-growth tech stocks. That too is down around 36% from its March highs, reflecting a wider selloff in DKNG-style companies.

“I think DKNG has gotten caught up in the ‘growth’ to ‘value’ reallocation from investors,” said Macquarie Capital analyst Chad Beynon.

He pointed out that ‘hyper growth’ software companies expected to grow over 30% were down 35% year-to-date.

“It is some much-needed froth being wrung from the market,” said one Wall Street analyst who asked not to be named. “DraftKings is still only back to where it was in January so it is hardly catastrophic.” The stock is still at around 10x 2022 revenues, so it is hardly cheap too.

Re-opening plays

Susquehanna analyst Joseph Stauff agreed the downturn was “primarily a wider market issue.”  

“Overall, stocks that benefit from re-opening activity are not getting hit as much as those that have been COVID beneficiaries,” Stauff told LSR.

In other words, investors are thinking people might return to concerts and restaurants rather than betting on sports.

DraftKings stock red flags

Even if the wider macro picture is largely to blame for the recent downturn, the Q1 results held some concerns.

Losses widened to $346 million, and the company warned those would continue to widen throughout 2021.

“We are not yet seeing an improvement on margins and improving costs on incremental revenue,” the analyst who requested anonymity said. “There’s nothing yet to show we are nearing an inflection point where this business model turns profitable. That said I still think  this [downturn] is 75% macro.”

DraftKings CEO Jason Robins expectedly put a positive spin on the earnings report:

“DraftKings is off to an outstanding start in 2021. We continued to make progress and remain on track with the migration to our own in-house proprietary sports betting engine, strengthened our content and technology capabilities with the acquisitions of VSiN and BlueRibbon Software, and invested in further differentiating our product offering with the upcoming rollout of social functionality in our DFS and mobile Sportsbook apps.”

Betting sector slump?

Beyond the wider economic picture and DraftKings itself, the US sports betting industry is also facing some headwinds. 

The sports calendar is entering a bit of a lull before the NFL returns in the fall. And state legislative sessions are drawing to a close around the country, removing potential catalysts.

Indeed, all US sports betting stocks have taken a beating in recent weeks, with Penn National also down around 44% from its highs.

A more sensible sector?

What does it all mean for the US sports betting market going forward? DraftKings is the “ultimate bellwether” for the industry, the analyst noted, so potentially expect less M&A.

“As DraftKings goes, so goes the sector,” he said. “DraftKings is your mark-to-market. If that valuation continues to retreat, all valuations come in.”

That could have a major impact on deals where before, companies were happy to pay massive headline sums because they were paying in stock. 

“It was all funny money,” the analyst said. “It didn’t matter.”

Bad news for FanDuel IPO?

The downturn in sentiment could also have an impact on a potential FanDuel IPO, which also could be affected by CEO Matt King‘s resignation. Flutter was potentially looking at a $30 billion valuation a month ago.

But knock 40% off that, and another 15% for the removal of the Fox Bet assets, and that IPO becomes somewhat less attractive.

Sentiment may yet rebound of course. As already noted, though, some of these stocks have a long way to fall before they are truly cheap.

Keep your eyes on that $DKNG ticker.