DraftKings (DKNG -0.66%) stock is performing exceptionally well in 2020, despite all the challenges from the lack of mainstream sporting events early on in the pandemic. The stock is up 350% year-to-date, pleasing shareholders who bought the stock earlier this year. This price appreciation currently makes the stock quite expensive.
If you're wondering why I am referring to a stock that's priced slightly below $50 as being expensive, that would be a valid query. After all, at $50, it does not seem expensive compared to Amazon's stock at over $3,000, or Alphabet's at over $1,500.
Let's dig a little deeper and try to uncover a few reasons why DraftKings stock is considered expensive.
More states are legalizing sports betting. Image source: Getty Images.
What the deal?
One perspective would be to look strictly at the price per share of stock. That is the price you see listed, and that changes throughout the day as buyers and sellers trade shares back and forth. Looking at DraftKings' stock from that point of view, $50 would not be expensive.
A different viewpoint, however, would be to look at the stock in terms of its price per dollar of sales the company generates. Through that lens, DraftKings is trading at a price to sales ratio of 38, which is quite expensive in itself and far above that of competitor Flutter Entertainment (PDYP.Y) (FLTR -1.52%)(see chart below).
A similar metric that measures enterprise value per dollar of revenue also reveals similar results. DraftKings is trading at an enterprise value to revenue of 45, compared to Flutter entertainment, which is trading at 9.
Data source: YCharts.
Why is DraftKings priced so high?
There can be several reasons why the market is pricing DraftKings stock at a premium. One of the main reasons is the bullish sentiment surrounding the legalization of sports betting and iGaming across many states in the U.S.
Since the Professional and Amateur Sports Protection Act (PASPA) was overturned two and a half years ago, almost two dozen states have legalized sports betting. Each state is unique, with its own twist to what it will allow. Complications aside, DraftKings now offers sports betting in 10 of those states. Investors are hopeful that the company will eventually offer wagers on sports in most states that allow the activity.
Moreover, with many state budgets reeling from the coronavirus pandemic's pains, hopes are increasing that states will be more sympathetic toward legalizing sports betting as it can help plug at least some of the budget deficits.
Even without considering any of the potential among new markets where DraftKings is yet to offer its products, the online sports betting company says it is forecasting a revenue growth of over 40%. The fact that it is doing so well in existing markets raises the expectations with respect to its potential as it expands into more states.
It's clear that there's huge potential for the company for rapid growth in the nascent U.S. market, and that is the main reason why the stock commands such a premium.
Is it too late to invest in DraftKings stock?
Investors who are concerned about missing the boat on DraftKings need not worry. Instead, a good way to start a position in the company would be to wait for a 10% to 15% pullback in its price to sales ratio from current levels. That's one way you can capture the opportunity offered by this growth stock.
