(Seeking Alpha) – Summary – Sports are back, and the competition is better than ever.
Reason one- Action enhances the sports experience.
Reason two- Technology and gambling are a potent combination.
Reason three- Caesar’s purchase of William Hill points to the trend.
Reason four- A rocky road during the pandemic- Bullish prospects for DraftKings that could deliver powerful returns.
I am a huge sports fan. Since I was a child, I have been rooting for my teams in football, baseball, hockey, basketball, and other sports. The global pandemic was the first time in my six decades where sporting events ceased. Along with many different sports devotees, the lockdown that lasted from March through the early summer was a blackout period in the sports world. We missed March Madness, the baseball season’s beginning, and big chunks of basketball and hockey. Car and horse racing were delayed or canceled. Soccer matches and golf tournaments experienced the same.
Sports returned over the past months, but it has been a different experience. The contests occur with either no fans or a limited number in the stands. Many of us are accustomed to going to sporting events and participating in the action, now sit on our couches watching our favorite teams while broadcasters pipe in fake crowd noise.
As a child, I religiously watched ABCs Wide World of Sports each weekend. The program that covered contests in many sports always began characterizing professional and amateur events as “The thrill of victory and the agony of defeat.” Betting on sporting events has been around as long as the competitions. The Black Sox Scandal was a Major League Baseball game-fixing scandal. Eight players on the Chicago White Sox faced accusations of throwing the 1919 World Series against the Cincinnati Reds in exchange for money from an illegal gambling syndicate. Laws had banned sports gambling for many years.
Meanwhile, it provided massive profits for organized crime. Today, gambling is taxed, regulated, and legal. A bet on a contest or anything related to sports allows viewers and fans to risk their money and experience the “Thrill of victory and the agony of defeat” alongside athletes.
DraftKings (DKNG) is a leading company in technology for sports betting. DKNG’s products are available through a traditional website, directs app downloads, and direct-to-consumer digital platforms. DraftKings is on the cutting edge of fantasy sports that allow enthusiasts to make bets on individual players’ performance in a range of sports. The company’s headquarters are in Boston, Massachusetts. DraftKings is a high-tech bookie. In April 2020, DKNG became a publicly traded company through a reverse merger with a special-purpose acquisition company.
My bet is that DKNG stock will move a lot higher. The thrill of winning and the agony of losing money is a powerful force for the growing addressable market for DKNG.
Sports are back, and the competition is better than ever
At the start of this summer, sports began to make a comeback slowly. A match play event between Tiger Woods and Phil Michelson on May 24 was the first significant event. Tiger’s partner was Peyton Manning, and Phil’s was Tom Brady. The superstar golfers and quarterbacks played a televised match for $10 million. An average of 5.8 million viewers tuned in, making it the most-watched golf telecast in the history of cable television. People were hungry for sports.
The NHL created a bubble in Toronto and Edmonton, leading to awarding the Stanley Cup to the Tampa Bay Lightning. The Los Angeles Lakers won the NBA championship this week, and baseball is now in its league championship phase. The football season is entering week six, and most other sports are back. While arenas, tracks, stadiums, and other venues remain empty or with minimal fans, people are watching sports. As the number of states that allow sports betting increases, the potential for the business is explosive.
DraftKings Inc. (DKNG) was trading at just over $51 per share on October 13. The company had a market cap of just under $18 billion and trades an average of over 19.5 million shares each day. The range in the stock has been from $9.85 to $64.19 over the past year since it became publicly traded. DKNG is a leader in online gaming and sports betting. The addressable market for the company is growing, and four reasons lead me to believe that the stock is heading significantly higher.
Reason one- Action enhances the sports experience
For many, supporting a team or player is enough reason to watch a sporting event. However, a growing number of fans want to put their money where their mouths are to benefit from a victory or favorable outcome. Fantasy teams, single-game betting, parlays, in-game wagering, and other ways to bet on the world of sports increase the viewer’s emotional tie to the event.
Sports betting is nothing new. As long as there have been sporting events, people bet on the outcomes. Over the past years, betting has moved from the illegal to the legal realm. With states and the Federal government hungry for new revenue sources, legal gaming has been growing by leaps and bounds, and that trend will continue.
Action in sports is now a multidimensional issue. The event offers excitement, but a wager enhances the “action” for individuals.
Reason two- Technology and gambling are a potent combination
Technology has changed our world over the past years. Our smartphones that fit in pockets are powerful computers. With the aid of a free and straightforward app, sports gambling is now available to those in a growing number of states where the activity is legal.
Today, a sports enthusiast can watch an event at home and place bets before the beginning of a contest and during the game or match. In-game betting opens a new world of gambling possibilities. Companies like DKNG make money each time a gambling subscriber places a wager. DKNG is an exchange, no different than the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), or other world platforms that offer market participants trading. Gamblers deposit money in accounts at DKNG; the more they bet, the more DKNG earns.
At the futures exchanges, increasing volume leads to increased earnings. The same holds for platforms like DraftKings. Moreover, the CME and ICE charge for historical data. DKNG will likely do the same in the future, creating new revenue verticals in the coming years. The CME and ICE have thrived on the back of technology. Technology and gambling are a potent combination for DKNG for the future.
Reason three- Caesar’s purchase of William Hill points to the trend
In a sign of a rise in the demand for online gaming, Caesars Entertainment (CZR) recently paid approximately $3.7 billion for UK-based William Hill. Tom Reeg, Caesars Entertainment’s CEO, said, “The opportunity to combine our land based-casinos, sports betting and online gaming in the US is a truly exciting prospect. William Hill’s sports betting expertise will complement Caesars’ current offering, enabling the combined group to serve our customers in the fast-growing Us sports betting and online market.”
One of the leading Las Vegas-based gaming companies has made a substantial investment in online sports betting. Ironically, CZR’s market cap at $55.50 per share was around the $11.3 billion level. MGM, another leading gaming company, has a market cap at the $10.4 billion level. Wynn Resorts (WYNN) had a $7.75 billion market cap at $72 per share on October 13. Las Vegas Sands (LVS) has around a $34 billion market cap.
Reason four- A rocky road during the pandemic- Bullish prospects for DraftKings that could deliver powerful returns
DraftKings’ market cap at over $18 billion was higher than all of the leading gaming companies except for LVS. The company has the potential to be a powerhouse in sports betting and gaming over the coming years.
In the short-term, the global pandemic could present a series of challenges for DKNG and all gaming companies. Further shutdowns that cause a suspension of sporting events would weigh on DKNG and other sport betting companies’ ability to earn profits.
A survey of eighteen analysts on Yahoo Finance has an average price target of $58.11 for DKNG shares, ranging from $37 to $76 per share. I believe the projections are very conservative, considering most Wall Street analysts have buy or overweight ratings for the shares.
DKNG has the potential to experience the kind of buying frenzy we witnessed in Tesla shares.
The chart of TSLA shares shows that the stock traded below a split-adjusted $60 from 2010 through 2017. It never moved above $100 per share before 2020. In 2020, a buying frenzy pushed the price of the speculative stock above the $500 level, and it was trading at over $445 on October 13.
While TSLA’s business is very different than DKNG’s, a leader in online gaming has the potential to attract the same type of speculative frenzy over the coming months and years.
At just over $51 per share, DKNG faces the challenges associated with COVID-19 and the short-term potential for events that could cause another suspension of sporting events. However, in the medium and long-term, the company that has a larger market cap than almost all of the leading gaming companies in the US, sans LVS, has the potential to soar and capture a substantial percentage of the market for online gaming.