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Why DraftKings Dropped 6% Today

By Howard Smith – Updated Aug 28, 2020 at 4:03PM

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A Morgan Stanley analyst just listed six reasons why he downgraded the stock.

What happened

DraftKings (DKNG -4.23%) is down 6% today, as of 3:15 p.m. EDT, after Morgan Stanley analyst Thomas Allen downgraded the stock to equal weight and offered six negative catalysts that might be looming. 

Fantasy football score sheet with cash and a beer on top.

Image source: Getty Images.

So what

The online sports-betting company's share price has more than doubled since it went public in April at a little over $17 per share. The analyst still raised his price target to $37, which is near where the shares are currently trading. 

The analyst believes there are some headwinds coming for the growth stock that has performed well even with much of professional sports suspended during the COVID-19 pandemic. 

Now what

He believes the pent-up demand for sports and sports betting will subside now that leagues are back playing. Allen also thinks that the lack of legislative moves for legalization of sports betting in more states, as well as the lack of legislation for additional coronavirus stimulus will impact the sector. The analyst also raises the possibility of the NFL season being cancelled, which is the biggest portion of the sports-betting market. 

While those possibilities all exist, investors should also be looking at more tangible things that the analyst cites. The lockup period for the initial public offering (IPO) ends Oct. 20, 2020, which could cause some short-term downside for the shares. 

But maybe most importantly is the potential that the built-in expectations on market share are not met. Casino operators like MGM Resorts International (MGM -2.27%) -- through its BetMGM app -- and Penn National Gaming's (PENN -3.75%) investment in Barstool Sports have vaulted some big players into the sector that DraftKings had more to itself just a few months ago. That is something investors need to pay attention to.

Howard Smith owns shares of MGM Resorts International. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

DraftKings Inc. Stock Quote
DraftKings Inc.
DKNG
$14.50 (-4.23%) $0.64
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$34.92 (-2.27%) $0.81
Penn National Gaming Stock Quote
Penn National Gaming
PENN
$33.67 (-3.75%) $-1.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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