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Why Shares of DraftKings Plunged 8.9% Today

By Travis Hoium – Jun 25, 2020 at 1:43PM

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This high-flying stock is having a big pullback today.

What happened 

Shares of DraftKings (DKNG -1.24%) plunged as much as 8.9% in trading Thursday as a pullback in gambling stocks continued. At 12:50 p.m. EDT shares were still down 4.9% on the day. 

So what

The biggest news of the day was that 1.5 million people filed for unemployment last week, worse than analysts were expecting. As that happened, COVID-19 cases were increasing in many southern states that had light outbreaks in the spring. This could lead to a slower economic recovery if people stay home in those areas. If these two negative factors keep people from having money to spend, even on online gambling, it'll be bad for DraftKings business this year as its products are becoming more available. 

Person placing a soccer bet on a mobile phone.

Image source: Getty Images.

I'll also note that the drop in shares comes despite Canaccord Genuity analyst Michael Graham's bullish note on the stock yesterday, including a $50 price target. That wasn't enough to send shares higher today. 

The drop in shares is actually pretty small when you consider that shares were near an all-time high earlier this week, and shares have nearly doubled since DraftKings went public via a reverse merger

Now what

I don't think the long-term prospects for DraftKings as a growth stock have changed at all today, and rough economic times may make more states likely to open online gambling. What I would worry more about is small operations and insiders selling a massive block of shares just last week. In the first quarter, DraftKings had just $88.5 million of revenue, which is extremely low for a company with a market cap of $11 billion. On top of that, 24 million shares were sold by "certain selling stockholders," or insiders.

There's a lot of potential for online gambling, but I think DraftKings as a stock is extremely overvalued. The huge sale of shares should show that insiders want to get out as well, which is why I'm not bullish on this stock long term. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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