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A Bad Sign for DraftKings Heading Into Earnings

By Parkev Tatevosian, CFA – Oct 28, 2020 at 8:37AM

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Could this be the reason its stock is down by 40% in October after seemingly going straight up for all of 2020?

Sports betting company DraftKings (DKNG -0.88%) is set to report earnings Nov. 13. The stock is already up a whopping 300% year to date, and that makes it vulnerable to bad news that could lead its stock price to pull back.

The coronavirus pandemic is causing many changes to consumer behavior, and one of them could be a bad sign for DraftKings. Investors will want to keep reading to find out what that is and how it might impact the stock. 

A group of basketball fans sitting in a room drinking beer, eating popcorn, and watching sports

DraftKings is hoping decreasing viewership did not hurt its revenue. Image source: Getty Images.

A large supply of DraftKings stock coming onto the market 

On Oct. 5, the company announced a public offering of 32 million shares of its stock priced at $52. That includes insiders selling 16 million shares and DraftKings selling the other 16 million. Certainly, it is not good news when insiders are cashing out. It could send a signal to the investing public that those with the most intimate information about the company are jumping ship. However, there could be other reasons why insiders are selling their shares that are not related to their confidence in the company's future. Still, even if the bad signal doesn't push the price down, the extra supply of shares in the market will.

Moreover, insiders still own as much as 45% of the company's stock. If they are indeed intent on reducing their stake in the company, the added pressure from selling such a large supply of shares could add downward pressure on the stock price in the near term. One reason that could explain a sudden desire to sell shares could be the dramatic decrease in sports viewership. 

Where did all the sports fans go?  

As a result of the COVID-19 outbreak, many sports leagues suspended their seasons starting in March. The public went months without any major sports to watch. During the hiatus, the growing consensus was that there would be this incredible pent-up demand for live sports once they returned to television. Unfortunately, for DraftKings, that has not been the case. Viewership and ratings for all major sports are down significantly since their return from the months-long pause.  

Although there is no definitive answer as to why this is the case, the most likely reason is the increasing viewership of cable news. With a raging pandemic and a hotly contested political climate led by presidential elections in the U.S., people are watching more cable news. Viewership on the big three cable news networks was up 78% during the first five nights of the NBA Finals compared with last year. Consequently, the NBA Finals saw record-low viewership during the six games, which saw the LeBron James-led Los Angeles Lakers defeat the Jimmy Butler-led Miami Heat to win the NBA championship.

Overall, the 2020 NBA playoffs averaged 3.04 million viewers across four networks, down 37% from last year. The NHL playoffs experienced a similar 38% decrease, and the MLB Division Series was down 40%. Golf, tennis, horse racing, and other sports are all experiencing large drops. The NFL is holding up better but is still down 13%; it's also been plagued by coronavirus outbreaks among its players, leading to the postponement of several games.

What it means for investors  

Decreasing sports viewership might be an indication of declining engagement with DraftKings and its services. Individuals who wager on sporting events are more likely to watch the event they have taken a stake in. Further, participants in daily fantasy contests are also more likely to watch their players in televised sporting events. 

That being said, when DraftKings gave a sneak peek into its third-quarter earnings results, it indicated that revenue would increase by a healthy margin. In fact, it stated that its online sports betting handle, the amount of bets placed by customers, surged by 460% from the previous year.

Still, the final figure remains to be seen when the company reports on Nov. 13. Even if DraftKings reports healthy growth in the quarter, it was likely negatively impacted by the decreasing sports viewership and the large sale of its shares during the period. That could help explain why shares of this consumer discretionary stock dropped by almost 40% in October.  

Parkev Tatevosian 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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