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Avoid DraftKings Stock

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There may not have been a worst time in the entire history of our country for DraftKings (DKNG) to IPO.

Well at least since the 1880’s when sports began being played to a larger degree in the US.

DraftKings is a “digital sports entertainment and gaming company.”

You can play fantasy sports or wager on a huge range of sports via different game types and mechanics on its app.

But since this pandemic first hit in mid-March pretty much all sports from professional leagues all the way down to kids playing sports at the local community center have been canceled in the US.

As of this writing no professional sports in the US are still being played outside of Major League Soccer (MLS).

Universities that play football are already announcing either the outright cancellation of Fall 2020 sports – including the ultra-lucrative football. Or are greatly lowering the amount or location of the games played.

The National Basketball Association (NBA) plans to return later this month – hopefully. But NBA players are already opting out of playing entirely. Or they’re getting the virus and then needing to get quarantined.

Major League Baseball (MLB) still isn’t playing as of this writing are fighting whether there will be any season at all.

And the US sports behemoth National Football League (NFL) is planning to play games still. But its already canceled half of the preseason due to fears of the coronavirus ravaging the players, staff, and fans.

With coronavirus cases exploding nationwide and specifically in some of the most populous states with sports teams, its looking less and less likely that sports will be back to normal any time soon.

If their seasons are played at all.

DraftKings entire busines model relies on sports being played so you can wager money on them in various ways.

Plus, on top of this DraftKings announced that it lost $72 million in the 1st quarter of 2020 due to lower wager volume on sporting events as the pandemic began.

In the first quarter before the lockdowns began, MLS, NBA, and the NHL were all playing games still.

Its 2nd quarter results are likely to be far worse since most sports still aren’t being played.

And now people are speculating in its stock massively with things like the Robinhood trading app.

Since its IPO in 2019 at $10 per share, it’s now selling at $35.75 per share as of this writing.

This is an increase of 258% increase in a matter of months. And most of this time DraftKings is earning $0 revenue due to sports being postponed or cancelled.

To further illustrate the insanity going on in DraftKings stock right now, in the full year of 2019 it earned $323.4 million in revenue… For the full year.

As of this writing its market cap is $12.7 billion.

This means its selling at a price to sales (P/S) ratio of 38.2.

And this isn’t even profits or cash flows which is the way most businesses are valued.

I can’t even show you those metrics for DraftKings because its unprofitable on both a net income and free cash flow basis.

Normally only high-tech startups that have the potential to transform the world are valued on their P/S ratio… And even then, a ratio of 38.2 is absurdly high.

This makes no sense by itself… But when you throw in the company is likely earning close to $0 revenue and its stock keeps going straight up… It makes even less sense.

The gambling going on in DraftKings stock is absurd right now. And I recommend you stay away from its stock.

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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

P.S. I didn’t say betting or gambling when it came to DraftKings operations because its not treated as a gambling operation. Its treated as a wagering operation.

This is a slight but important difference when it comes to regulations.

And its also truly how DraftKings s operates as well.

For example, depending on the game mode, you can pick a team of players for that weeks NFL games by paying say $5.

If the team of players you picked scored the highest amount of points in the given game you win a huge cash prize from the other people who wagered and lost.

While other players who finished behind you split a part of the remaining money based on their placement.

This is how the business model is different than gambling.

A huge part of the money is paid out to players no matter what based on how many points they scored and where they placed.

Where in gambling almost all the money is lost and goes to the casino no matter what game you play. Of course, unless you win.

Yes, these are simplified examples, but I wanted to explain the main difference here between wagering and gambling because it’s important to understand.

This difference is also why DraftKings is legal in many states while gambling is not.

 

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