What happened
Week to date, shares of DraftKings (DKNG 4.96%) were down 12.6% through Thursday's market close, according to data provided by S&P Global Market Intelligence.
The stock has more than doubled this year, as the company achieves higher profitability well ahead of expectations. But the stock tumbled this week after Walt Disney's ESPN partnered with sports betting rival Penn Entertainment to form a new platform that could compete aggressively with DraftKings.
So what
The deal with Disney will give Penn exclusive access to ESPN content with a deeply integrated new platform called ESPN Bet.
Obviously, a partnership with the leading sports network will present stiff competition for acquiring new users. It comes just as DraftKings is experiencing tremendous momentum in its business, with monthly unique payers up 44% year over year in the second quarter. The company has been successful expanding its sportsbook and iGaming products to new jurisdictions.
However, the concern is that integration with ESPN would give Penn a great marketing pitch for new customers, and it could force DraftKings to spend more on technology and new product offerings to stay ahead of the game. All said, the new ESPN Bet platform could make it more expensive for DraftKings to grow its customer base, and therefore, raises uncertainty about its future growth and profitability.
Now what
Given DraftKings' momentum in the burgeoning sports-betting market, investors should probably wait to see how this plays out before making a rash decision with their investment.
DraftKings is a leader in this market, so it may not be as easy for a new platform to win away customers as the market thinks right now. Indeed, J.P. Morgan analyst Joseph Greff upgraded the stock after the news this week citing a more attractive valuation for DraftKings shares following the dip.
