DKNG stock: If DraftKings dips again, it could turn into a buy
Finding a floor at around $20 per share, after its continued fall over the past month, may seem like the perfect time for some to enter. DraftKings (NASDAQ:DKNG). Unfortunately, while the two factors that pushed it down continue? It may be too early to bottom fish with the DKNG stock.
What do I mean? First, there is the bubble that emerged in gaming (gaming) stocks last year and may continue to deflate. Second, the rate hike factor. With the market calming down, after worrying last month about larger interest rate hikes and more numerous than expected, it may seem that the Federal Reserve’s tightening plans are priced in.
However, with the central bank keep your options open, rates could still rise much more and much faster than what the market has priced in to stock prices. That may mean more compression for DraftKings’ still lofty valuation.
In short, it’s not a good buy today. Yet what if these negative factors end up happening and stocks fall another 30%, 40% or 50%? This could well become a great opportunity.
Why DKNG shares may continue to fall
After falling more than 25% since January and more than 50% since November, it may seem like the dust is settling on the DraftKings sale. Other pure sports betting games in the USA, like Rush Street Interactive (NYSE:IRS), began to rebound. Stocks in land-based casino companies with exposure to sports betting, such as Caesars (NASDAQ:CZR), MGM Resorts (NYSE:MGM), also began to recover.
DKNG stock itself may seem poised to begin a comeback. Its short-lived spike last week may mean many on the sidelines are chomping at the bit to get into stocks at a “can’t miss” price. Yet, the trends are still not on the side of the sports betting industry.
Again, rising interest rates could continue to drive down frothy valuations for sports betting stocks. Especially if the Fed ends up taking more aggressive measures to control inflation. But alongside this, investors continue to be wary of the economics of the sports betting/i-gaming industry.
Primarily, the high marketing/promotional costs needed to attract customers. Additionally, as Truist gaming industry analyst Barry Jonas pointed out, the high tax rates in newly opened jurisdictions like New York (51% of net gain) could also make profitability difficult. Both of these factors may have played a role in Wynn Resorts’ (NASDAQ:WYNN) decision to list its sports betting unit for sale at a heavily discounted price.
At what price would DraftKings become a buy?
At current prices, I take a bearish view of DKNG stock. But that doesn’t mean I’m completely bearish about it. As bullish analysts like Thomas Allen of Morgan Stanley have argued, he has first market share in the sports betting industry. This, coupled with the expansion of sports betting in other major US states (like California), indicates continued high growth.
However, while the long-term outlook remains bright, short-term challenges may continue to overshadow it. According to how much these factors still weigh on it? That could be enough to bring this former special purpose acquisition company (SPAC) back to its offering price of $10 per share. Otherwise, a price not that high. Say, between $10 and $15 per share.
If that happens (and I admit it can be a big “if”), you want to dive in at this point. After another high double-digit percentage drop, it will reach the point where it is truly oversold. At lower prices, it will no longer trade at a high premium to its peers, as Looking for Alpha commentator recently said, remains a problem.
Additionally, at a much lower price, it may be attractive as a possible buyout target. Caesars could use it to strengthen its sports betting unit. In a bizarre twist of fate, DraftKings instead buys a UK sportsbook company hear (OTCMKTS:GMVHY), which it tried to do last year, the joint venture of MGM and Entain, which operates the betMGM app, gobbles up DraftKings when it’s cheap?
Wait for now, but pounce if he falls again
Granted, my suggested play with DraftKings (wait until it drops to $10-$15 per share) isn’t foolproof. In hindsight, $20 per share might turn out to be its bottom. Those who are too careful (like me) could “miss” his return.
Again, don’t assume that a “return” for this stock means a return to its highs. Instead, a partial recovery may be the best case scenario. Weigh that against the odds that the issues that brought him down will continue to do so, and just like my InvestorPlace colleague Joel Baglole recently noted, stocks at current prices are not worth the risk.
Unless it drops further, at a truly “can’t miss” price, keep waiting on DKNG shares.
At the date of publication, Thomas Niel had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
InvestorPlace.com contributor Thomas Niel has been writing individual stock analysis for online publications since 2016.