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Could the timing from DraftKings (NYSE:DKNG) have been any better? After getting the green light to move forward on April 15, DraftKings stock “went public” on Friday, April 24.
Source: Lori Butcher/Shutterstock.com
Shares opened for trading at $20.49 and ultimately climbed more than 10% in the trading session. This wasn’t a typical offering, though.
Diamond Eagle Acquisition agreed to buy DraftKings and SBTech in December. The deal included Diamond Eagle changing its name (to DraftKings) and ticker, reincorporating in Nevada and remaining on the Nasdaq exchange.
Known as an SPAC — special purpose acquisition company — it’s not some secretive play in the stock market, although it’s not as common or well known as a traditional initial public offering (IPO). From here, what can investors expect?
Needing to Reopen America (or Do We?)
As the country and the world get back to normalcy, we’re seeing shuttered businesses begin to reopen. Delta Air Lines (NYSE:DAL) is flying more and Starbucks (NASDAQ:SBUX) has most of its locations opened. MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN) are set to reopen with Las Vegas.
As the country starts to reopen, these stocks are ripping higher in anticipation of stronger results. A return to business is good for everyone — particularly those that have been out of business. For the casino stocks, a return to gaming will be a big tailwind provided there’s adequate foot traffic. But for companies like DraftKings, an eventual return to sports will be a big win.
So far though, reopening hasn’t mattered to DraftKings stock.
Shares have exploded higher, currently up more than 98% from the open on April 24. That’s even with the recent 10% pullback in the stock. What do investors make of this? It’s great to see DraftKings stock performing so well. Given how much it’s rallied and its valuation at present time, it makes it hard to be a buyer right now.
A Closer Look at DKNG
Analysts expect the company to lose 71 cents per share this year and 56 cents per share in fiscal 2021. That means we need to look elsewhere besides the bottom line to get some perspective on DKNG.
On the revenue front, forecasts call for $492 million in sales this year and 51% growth to $745 million in 2021. Next year’s acceleration may even be conservative given the stifled growth environment we’re in due to the novel coronavirus. That is, the comps in 2021 should be vastly superior to 2020 given how many sporting events we’ve missed over the past few months.
With a $12.5 billion valuation — leaving DraftKings stock valued at 25 times this year’s revenue and 16.5 times next year’s revenue — shares are not cheap.
It’s worth pointing out that the company has no debt and more than $450 million on its balance sheet. Management says it can handle the $15 million to $20 million in monthly cash burn despite there being no major sports in play right now.
The bottom line here is simple: DraftKings is a play on gaming revenue, which will eventually rebound and the stock is reacting in kind. Its balance sheet is strong for the time being, but the stock is not cheap.
I like it, but on a pullback.
Where to Buy DraftKings Stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com
The question becomes, what does a pullback look like in DraftKings stock?
Remember, the stock existed before the name change and ticker change, so we have more levels to consider and watch now. So far, the 10-day moving average has been support for two months, which happens to come into play near the 78.6% retracement.
That could give short-term traders and aggressive bulls a solid buying opportunity. A deeper correction could send DraftKings stock down toward the $32 level. There it finds a prior breakout level, the 20-day moving average and the 61.8% retracement. $28 is the next level to consider on a further correction.
Because of the big run in both DKNG and the market, it’s hard to know what type of pullback we’ll get. But buyers should be ready to pounce once DraftKings stock finally settles down.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
