Why DraftKings Stock May Be A Riskier Gamble Than You Think

(Business Daily) – DraftKings (DKNG) could get a lift if New York legalizes online gambling, but an industry observer says sports wagering may be riskier than it seems. DraftKings stock fell.

Online betting has been one of the ways states are considering to recoup heavy Covid-19 related losses. Wall Street is hopeful that New York may legalize it as soon as next year.

But Ross Gerber, CEO of Santa Monica, Calif.-based Gerber Kawasaki, said that doesn’t mean it’s going to be an easy road to legalization. Like the legalization of cannabis, sports betting is seen as a lightning rod issue among more socially conservative constituents.

“It’s not a pure profit for the state because gambling creates social woes like drug abuse, addiction, divorce, that ultimately the states pay for,” he told IBD in an interview.

Gerber says massive decline in sports viewership during the pandemic is worrisome too. “Younger people are more into esports and video games, TikTok and social media and that can have an impact on sports betting,” he said.

What’s more, Gerber said, sports fans don’t actually like the games in big stadiums without fans. “It’s just weird looking,” he said. “Part of it is that the production value of it is just different.”

He thinks the combination of these two realities means fewer people are likely to sit down for three-and-a-half hours to watch a game and follow their wagers.

Gerber also doubts many folks have the disposable income to gamble these days.

“How many people can afford to lose $50 a month during this time?” he said. “So that’s another headwind.”

As a result, Gerber says rival online betting companies like DraftKings and FanDuel, “who really don’t differentiate,” are going to have to spend more to attract new users. “I think it’s going to be a tough business, he added.

Gerber also thinks online betting company stocks are more than fully valued for the best-case scenario.

DraftKings Stock Reverses
Shares gave up the day’s early gain, sliding 5% to 48.58 on the stock market today. DraftKings stock has declined considerably in the last couple of weeks from its high of 63.78 on Oct. 2.

DraftKings’ gambling and entertainment rivals who combine online and brick-and-mortar operations include Penn National Gaming (PENN) and Caesars Entertainment (CZR). Penn was down 0.25%. It has an RS Rating of 98. Caesars was up 0.76% on Wednesday. It has an RS Rating of 93. DraftKings has an industry-topping 99 RS Rating.

Oppenheimer analyst Jed Kelly sees “recent price weakness creating a compelling buying opportunity” for DraftKings stock.

But DraftKings and its rivals are spending heavily as online gambling expands. And with more folks at home during the pandemic, DraftKings has upped its marketing to reach them.

“Increased time spent at home due to Covid-19 has resulted in increased response rates to our advertising spending and, even with our scaled-up spending on customer acquisition, recent customer acquisition costs have been better than our expectations,” it said in a regulatory filing earlier this month.

The company expects sales and marketing expense of $200 million to $210 million in the third quarter. The figure is considerably higher than the $140 million Needham analyst Brad Erickson estimates for Q3.

Meanwhile, the coronavirus pandemic has been another headwind on DraftKings stock. Several NFL players have recently tested positive for Covid-19, causing games to be postponed. Prospects for the rest of the season remain up in the air. The uncertainty has had a chilling effect on sports betting companies lately.

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