My best stock in 2020 was also an unexpected one. I bought DraftKings (DKNG -0.21%) with the expectation of holding it for years. Then, sports betting stocks went through the roof. I've increased and reduced my holdings in DraftKings a few times this year due to the big volatility, but my big locked-in gains were on shares purchased on July 22, and sold off in chunks on Sept. 22 and Oct. 6, for gains of 46.39% and 57.04% respectively.
My success on the stock is a double-edged sword. While I managed to lock in most of my profits when the stock was up in the high $50s before a major correction, the call was short-lived. DraftKings shares have recovered a great deal from the dip, now trading around $53.70 per share. This is a lesson for you would-be traders. If you have a strong conviction on a company, with a true thesis, it usually pays to just stay invested.
Can DraftKings keep it rolling?
As with most equities these days, the investment basis is the tug of war between potential and valuation. DraftKings' market capitalization of $21.1 billion dwarfs its 2020 revenue guidance of $540 million to $560 million provided in its November earnings release. Next year's revenue expectations are in the range of $750 million to $850 million. With analysts expecting losses to continue through 2021, it is well evidenced that DraftKings shares have a lot of future growth already valued in.
Finding value has long been preached as the key to successful investing. These days, investors are getting pushed more and more into speculation if they want to create above-average returns. Stocks like DraftKings fall right into that category. That doesn't necessarily mean that investing in something like DraftKings is a bad idea.
Some reports have asserted that the global gambling market could be around $127 billion by 2027. Last year, Morgan Stanley analysts predicted that the U.S. gambling market would reach $8 billion by 2025. Assuming these estimates are anywhere near reality, DraftKings is fighting for a domestic market share that is less than half the size of its market capitalization.
In the long term, the industry potential outweighs the risk
Overall, I'm still bullish on the stock, but investors need to understand that this company could take a long time to live up to its current share pricing. The sports betting industry is going to largely be dominated by those that can push marketing and user experience in order to gain market share early. DraftKings had so many fantasy users prior to the beginning of legalization through states that it already has a loyal consumer base. I expect that trend to continue. The company raised capital earlier this year and has the advantage in terms of time.
The competitor that does seem primed to compete step for step with DraftKings is Penn National Gaming (PENN -0.25%). The Barstool brand, which Penn National took a very large stake in, has such a following that Penn National will undoubtedly be one of the top competitors in the U.S. market.
Overall, I think these will be the best investments for online sports gambling in the United States. I'd like to get more DraftKings shares in the $45 range. My reasoning? Limited downside potential. Earnings are nonexistent, and sales don't come close to matching the worth of the stock.
The industry is caught up in the market highs being seen throughout. The volatility is there for a name like DraftKings to have another big pullback. There's nothing wrong with nibbling at current levels, but sports betting stocks like DraftKings certainly have downside risk in the shorter term, creating the potential for better buy-in marks.