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DraftKings Poised to Benefit as Sports Restart

By Parkev Tatevosian, CFA – Jul 16, 2020 at 8:00AM

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DraftKings relies on major sports leagues to generate interest in its contests.

DraftKings (DKNG 8.54%) is going through the most challenging time in its young history. The coronavirus pandemic caused major sports leagues to suspend or pause their seasons. And since DraftKings derives almost all its revenue from creating contests that reward prizes based on the outcome of sporting events, it has been devastating to its business. 

Fortunately for DraftKings, the world is entering the next phase of the pandemic, which is a slow reopening of the economy. Sports leagues received the necessary permission from government authorities to restart their seasons if they follow the required health protocols. Let's take a closer look at how DraftKings is poised to benefit as a result.

A man celebrating after winning a contest on DraftKings

The National Basketball Association is set to resume action on July 30. Image source: Getty images.

DraftKings is set to cash in when sports continue  

The company runs daily fantasy sports contests where its entrants pick a group of players from a specific sport and compete against other entrants for a prize pool designated by DraftKings. The participants must pay an entry fee, and the total prize money awarded is usually much less than the total entry fees collected. For example, 50,000 participants enter a contest paying a $25 entry fee for a total of $1.25 million in entry fees. DraftKings will designate a prize pool of $1 million and keep the difference. 

The National Basketball Association paused its season on March 11 when one of its players, Rudy Gobert, tested positive for the coronavirus. Thankfully, the NBA is set to resume its season on July 30 in Orlando, where all teams will be housed at a Disney resort. What's more, the league is planning on having games every day from morning till evening. This would make DraftKings' contests more interesting because of the vast amount of players to choose from, making it possible to create many more unique teams to enter into a competition.

Further, Major League Baseball is planning to start its season on July 23. MLB is another popular sport for DraftKings because they play multiple games per day, seven days a week. In contrast, the NFL has most of its games on Sunday, making it challenging to run contests for football on any other day besides Sunday.

Admittedly, getting through the season while keeping players from getting sick with COVID will be a challenging endeavor. Major League Soccer already experienced some difficulties as players tested positive after the restart of their games. However, the protocols the NBA is undertaking are reported as being much more rigorous compared to the process the MLS took.

Stacks of hundreds of one hundred dollar bills representing a potential payout on DraftKings.

Prize pools often eclipse $1 million on DraftKings. Image source. Getty images.

What this means for investors

Crucially, DraftKings is set to experience a significant boost in revenue once these seasons get underway. The pandemic is still among us, and people are staying home a lot more. The increasing demand for in-home entertainment and the lack of sports for the last few months likely means there is an incredible pent-up demand. Moreover, many card rooms and casinos are still closed around the U.S., and when the sports seasons restart, DraftKings' contests will be one of a few ways in which people can participate in games of chance safely

It will be interesting to observe if the safety protocols undertaken by the sports leagues allow them to complete their seasons from start to finish. If they are successful in doing so, DraftKings' stock is poised to benefit. 

Parkev Tatevosian owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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