Place Your Bets on DraftKings Now

(Veteran tech columnist Jon Markman publishes of Strategic Advantage, a popular daily newsletter about the great digital transformation of business, entertainment and society — and how to invest in it. Click here for a free two-week trial.)

COVID-19 took a big bite out of casinos earlier this year and online gambling businesses capitalized. Despite the likelihood of vaccine, DraftKings Inc. ((DKNG) -Get Report) is about to gobble up even more.

Analysts at Loop Capital began coverage Tuesday of the sports betting and iGaming business with a strong buy and lofty price target. I agree. DraftKings is an important digital transformation story that spans horse-racing, football, boxing, baseball and more.

Longer-term investors should be buying the stock here.

The Boston, Mass.-based firm is the product of an three-way merger in April with Diamond Eagle Acquisition Corp, and U.K-based SB Tech, a sports betting technology company. The combination mixes strengths in online fantasy sports, finance and best-in-class digital wagering technology. It’s also the only vertically integrated public sports betting company in the United States.

That’s important because legalized sports betting is sweeping through United States.

Since a New Jersey supreme court ruling in 2018, 21 states have legalized online sports wagering according to an ESPN report, and an additional 26 states are on track to do the same. At this point, only Idaho, Wisconsin and Utah are outside looking in.

The appeal for states is fees.

David Katz, an analyst at Jefferies says the total addressable market for legal sports betting in the United States is currently $13 billion. A DraftKings investor presentation last December put that number nearer to $21 billion, assuming all of the states looking to legalize come online during the next two years.

The United States is a hotbed of professional and college sports and SB Tech’s bet engine, risk management tools and algorithms are robust enough to accommodate a barrage of non-standard, in- game bets.

For example, patrons will be able to wager on live, play-by-play outcomes. That’s so much more than betting winners, losers and the over/under for points scored. It’s a big opportunity to attract new bettors and grow sales.

New Jersey was the first state to move aggressively toward iGaming. Even without SB Tech last year, DraftKings has been able to grab 30% market share and $75 million annual sales. However, with the backend tech now in-house, the business is growing exponentially.

DraftKings reported third quarter financial results last week. Sales grew to $133 million, an increase of 98% compared to a year ago. Bettors, or what the company calls monthly unique players surged 64% to more than 1 million. And the company raised the midpoint of its 2020 guidance from $520 million to $550 million.

This growth is central to the Loop recommendation. Analysts see the total addressable market in the United States nearer to $30 billion versus the approximately $20 billion other firms are modelling. As a result Loop has a $100 price target for DraftKings shares. The record high is $64.19.

The stock has been my radar for a while. I originally recommended shares at $25 in May because I was impressed how quickly corporate managers adapted to shuttered sports leagues.

The company signed a deal with Electronic Arts ((EA) -Get Report), the publisher of the Madden NFL video game franchise, to show live simulations six times a day. Although eSports has yet to generate significant income from bettors, the exercise kept patrons engaged and illustrated the versality of the platform.

And in October with the stock trading in the low $50s I told investors to exit in anticipation of a decline back to the lower $40 range. That decline came when DraftKings filed with the

Securities and Exchange Commission to sell 32 million shares.

It’s now time for investors to go all the way back in.

DraftKings isn’t an investment story about the pandemic or even the health of professional sports leagues. It’s a digital transformation story. The company is building the biggest and best platform to collect and monetize sports betting and iGaming transactions.

As states clamor to replenish their coffers ravaged by the pandemic, more are likely to allow online transactions. DraftKings will gobble up share quickly. Profits will follow.

Based on the addressable market shares could trade to $75 during the next 12 months, a gain of 70% from current levels. 



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