Should You Invest in DraftKings Stock?
In May of 2018, New Jersey won a landmark case in the Supreme Court. This victory repealed a long-standing ban on states’ rights to legalize sports gambling. Since then, the floodgates have been open for states to legalize sports betting. This has led to a rise in DraftKings stock and other investments. In just two short years since this decision, more than $20 billion has already been bet with DraftKing’s U.S. sportsbook.
If you’re a big sports fan, then you’ve most likely heard about DraftKings, thanks to its aggressive ads. If not, DraftKings is an online sports gambling company. Thanks to the ease of use of its app and frequent promotions, it has built up a solid user base. This begs the question: Should you invest in a hot, young company that’s in an exciting, freshly legal industry?
Let’s take a look at a few reasons why you should consider investing in DraftKings stock…
NOTE: I’m not a financial advisor and am just offering information and commentary. Please do your own due diligence before making any decisions. I also own a small position in DraftKings.
DraftKings Stock Still Run by Its Founders
DraftKings was founded in 2012 by Jason Robins, Matt Kalish and Paul Liberman. All three are still involved in the company.
In general, founder-led companies tend to have a better track records of success. If you look at some of today’s most successful public companies, almost all are founder-led. For instance, there are Facebook and Zuckerberg, Netflix and Hastings and Amazon and Bezos (until just recently).
DraftKings’ founders have dedicated the past eight years of their lives building the company into what it is today. And they will want to continue their success. Since sports betting was just legalized two years ago, the company will likely have a huge second wind. This could push DraftKings stock higher.
Sports Gambling Is an Industry on the Rise
Let’s compare the sports gambling industry to another up-and-coming industry, marijuana.
Marijuana used to be known as the “devil’s lettuce,” and smoking it was a serious offense that could land you years in jail. Now it’s legal in close to 20 states, and you can find hemp and CBD products in your local grocery store. On top of that, legal cannabis is expected to generate $43 billion by 2025. It’s a growing industry. Here are some of the top U.S. marijuana stocks.
On that same note, gambling used to be associated with mobsters and money laundering. Now companies like DraftKings make it fun and harmless to bet a few bucks on your favorite sports teams. The stigma surrounding DraftKings stock and the entire sports gambling industry is shifting. Already, in just two years, 20 states have rushed to legalize sports betting. States where sports gambling is legal, like New Jersey, are generating tens of millions in tax dollars.
Online Sports Betting Has a Distinct Edge
It’s important to note the difference between in-person betting and online betting. Most states choose to legalize both, but some states have chosen to legalize one and not the other. In total, more than 20 states have legalized sports betting in some form. Of these, 18 have legalized in-person betting, compared with just 14 for online betting.
Yet when it comes to where people prefer to do their betting, the internet is by far the more popular choice. According to Sports Betting Dime, more than 80% of the total bets placed in New Jersey in 2019 were placed online. When it comes to online gambling, DraftKings is in more states than any other operator.
DraftKings Stock Earnings
So far, I’ve discussed a lot of external factors surrounding the industry. Sure, sports betting may be on the rise, but will DraftKings stock and the company benefit?
DraftKings went public via a SPAC merger with Diamond Eagle Acquisition Corporation in late June of 2020. If you’re not familiar, a special purpose acquisition company, also known as a SPAC or “blank check company,” is a company with no actual business operations. Instead, a SPAC’s main goal is to buy another business that’s already thriving. You can learn more about going public via SPAC here.
Since DraftKings has been public for only almost two years, there isn’t a lot of financial data to review. Additionally, most of its time as a public company came during 2020, when many live sporting events were canceled. As you might imagine, canceling live sports for a company like DraftKings is like banning the consumption of chicken for a company like KFC.
Despite this mild hiccup, DraftKings grew its revenue by 90% from 2019 to 2020. Furthermore, for the 2021 fiscal year, the company recorded nearly $1.3 billion in revenue, representing over 23% growth year-over-year. That said, it also posted a whopping loss of $1.23 billion for 2020. And DraftKings reported even further losses of nearly $1.52 billion in 2021.
Evaluating its performance so far is like trying to evaluate the potential of a first-round draft pick who sat out his rookie year with a torn ACL. It’s hard to draw any concrete conclusions because the company hasn’t really been given an opportunity.
DraftKings Stock Prediction… Should You Invest in DraftKings?
At the end of the day, DraftKings is an exciting young company in an industry that has amazing potential to grow. I’d be doing you a disservice if I didn’t bring up a few of the risks associated with the business, though, so here they are:
- Competition – DraftKings and FanDuel are the Uber and Lyft of their industry. These two will likely be in a cutthroat fight over the coming years.
- Societal pushback – Gambling is addictive, and DraftKings makes it incredibly accessible. It tends to treat gambling much more like a video game than a risky practice that has consequences. This could lead to increased scrutiny and regulation.
- Future variants of COVID-19 – Another wave of COVID-19 could crush DraftKings stock.
- Gambling laws are complex – Each state has its own rules and essentially acts as its own market. For DraftKings, this means high costs and potential lawsuits.
There are definitely plenty of risks associated with DraftKings stock. However, like the company’s slogan says, “Life is more fun with skin in the game.”
About Teddy Stavetski
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.