Should You Buy DraftKings Stock Ahead of the NFL Season?

The National Football League is set to start its regular season on Sept. 9. The NFL is the most popular sport in the U.S., drawing in a large fan base. Already, NFL pre-season games are attracting millions of viewers.

DraftKings (NASDAQ:DKNG) is a site that offers daily fantasy sports, mobile sports betting, and iGaming. It’s no surprise that the NFL is the league that brings in the most action for DraftKings. Let’s take a closer look at this gaming stock to determine if it makes a good investment. 

Image source: Getty Images.

Riding the wave of legalization 

DraftKings is growing revenue and monthly active users rapidly, increasing by 297% and 281%, respectively, from the previous year. Wagering on the outcome of sporting events is a popular activity previously confined to land-based casinos. However, since the Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA), more than a dozen states have legalized it, and more are considering it.

Mobile wagering is gaining popularity with state governments because of the tax revenue it generates. Legislators bring more revenue to the budget without raising taxes on individuals and businesses. For that reason, it’s likely to get adopted by more states. 

That would be welcome news to DraftKings as it will open new markets for it to acquire players. As of Aug. 6, the company is live in 12 states representing 25% of the U.S. population for mobile sports betting, and four states representing 10% of the population for iGaming. So while DraftKings is growing rapidly, there is plenty of room left for expansion.

Indeed management estimates that eventually the mobile sportsbook and iGaming market will be worth $68 billion annually, from which a market share of 30% and 19%, respectively, is entirely possible based on current trends.

Using more conservative estimates, management believes it can earn $1.7 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) annually in the long run. That’s certainly a long runway for growth considering the company barely earned $615 million in revenue in 2020. 

Should you buy DraftKings stock now? 

DraftKings has excellent prospects. That being said, there are still risks that could derail its growth. There is no certainty that the current trend of state legalization of gaming activities will not reverse. Moreover, the company is far from being profitable. DraftKings is investing aggressively to acquire players and build out its platform. It has yet to prove it can sustainably generate profits. 

And the stock is not cheap, trading at a forward price-to-sales ratio of 18.83. Admittedly, the NFL season will give it a boost, and the company is estimating it will finish fiscal 2021 with $1.25 billion in revenue. Still, it may be prudent for all but the most risk-seeking investors to wait for either a pullback in the stock price or for the company to make more progress toward profitability before buying. In other words, you probably shouldn’t buy DraftKings stock ahead of the NFL season.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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