Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
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Hey Traders,
Sports gambling is huge.
Every day, on my way to pick up the kids, going to and from the gym, or whenever I am in the car … I listen to sports talk.
Yes, I love sports – but I find the banter to just be fun to listen to.
But whether I’m in Chicago listening to 670 the Score, New York listening to the Fan, or here in Austin listening to 104.9 the Horn, it’s impossible to ignore the amount of advertising for gambling sites.
FanDuel, MyBookie, BetMGM – you name it. They’re all advertising on sports talk radio.
For this week, I want to take a look at the biggest of the pure online gambling companies …
DraftKings (Ticker: DKNG).
DraftKings started off in the paid fantasy draft business (thus the name). They merged with Fanduel a few years ago and have become a behemoth in the online gambling business.
So let’s break this down.
The Good
This company has 4200 employees and has revenue nearing $3 billion a year. I have to say, I was surprised by how many people work for this company.
The company is sitting on 1.78 dollars of cash per share and has revenue per share approaching 6 dollars. The revenue growth is great, growing 84% year over year.
Fundamentally, that is all there is to report … because everything else is bad.
Looking deeper, the reason to be long though is not what it is now, but what it could become.
Online gambling is a fast growing business, but advertising is KILLING the profits. There are too many sites and too many legacy casinos that have books.
But here’s the good news – with where we are in the cycle, the ease of entry isn’t giant, but the ease of client acquisition is mountainous.
This industry is going to consolidate, and many players are going to fall by the wayside. DKNG is in a position to take advantage of this because it has the market size and capital to lose money for a long time before it runs into trouble.
That said … it could run into trouble…
The Bad
This company loses money – and a lot of it. Last year it lost $1.3 billion.
The company, while it has access to capital, is burning a lot of cash. It had negative cash flow of 2.51 in the last twelve months.
They’re up against the giants of Caesars, MGM, Las Vegas Sands, and Wynn as well. They all have deep pockets and positive cash flow from their ground operations to pull from.
Basically, if all you did was look at the books, this is probably a losing stock. The amount of time it’s going to take DKNG to make money is a long way away.
The Verdict
In the online space this company is going to likely be a winner … especially if they engage AI.
One of the major soft spots for casinos is smaller games. Everyone knows how efficient the books are at things like the NFL, NBA, and MLB.
But what about small conference NCAA basketball – you ever bet on the mid-south conference? Most of the sharps make money on these types of bets.
How much do you know about college hockey? The sharps know and take money from the casinos. With AI the odds on these games could move dramatically in the favor of the casinos.
In the end, I don’t like DKNG for 26 bucks a share. But would I sell the June 2024 17.5 put at 1.75? I probably would.
This stock is a buy in the mid teens – I think they end up one of the winners.
Questions on that? Leave a comment below!
Your Only Option,
Mark Sebastian