Is It Too Late to Buy DraftKings Stock?

Even with the big pullback from April’s peak, DraftKings (DKNG 2.16%) stock is still up more than 200% just since the beginning of last year. That’s huge. It’s so huge, in fact, that it could be intimidating to interested buyers. Bolstering their worries is the threat of higher tax rates on gambling revenue in at least one key market. Maybe DraftKings’ highest-growth days are all in the past.

More likely than not, however, they aren’t. If anything, this ticker’s recent weakness is actually more of a buying opportunity than a warning.

In the right place at the right time

DraftKings manages on online sportsbook — at least, in states where it’s legal to do so. While its roots are in the fantasy sports business, 2018’s reversal of the federal ban on sports wagering has led to the legalization of sports betting in nearly 40 states. DraftKings has also tiptoed into conventional gambling games like online poker (or iGaming) as well as lottery ticket sales.

The company has taken full advantage of this widespread wave of legalization, too. From 2019’s top line of $431 million to last year’s $3.66 billion en route to this year’s guidance of $4.9 billion, revenue has grown at an annualized pace of 70%. Its regular customer count has grown from 1.9 million to 7.1 million during that time frame.

Perhaps just as important, DraftKings continues to make progress toward profitability. The only problem? Some investors aren’t so sure the foreseeable future is as bright as the past. Most states have already legalized sports gambling and/or online casino gambling, after all. As such, most of any new business stemming from ongoing legalization efforts is seemingly already being done rather than waiting to be won.

The state of Illinois also recently made bearish waves, entertaining legislation that would tax such gambling revenue — as opposed to taxing net income — at a hefty rate of 40%, upending the stock as a result. Although the measure hasn’t yet become law (and may not), the fact that it’s even being considered could inspire similar efforts in other states.

The bullish case for DraftKings

These worries, however, look past a handful of bullish factors that could readily rekindle a rally for DraftKings stock. One of these factors is a misunderstanding of how the wagering business grows once it’s legalized in a particular state.

The graphic below, taken from November’s Investor Day presentation, tells the tale. DraftKings lays out how the longer the company operates in a particular state, the more revenue it reports. That’s largely because interested consumers slowly but consistently become paying customers.

It’s bullish if for no other reason than we don’t know how long a state’s revenue can grow. All we know for sure right now is that since 2018’s repeal of the sports betting ban, the average state’s betting “handle” and its corresponding revenue continues to grow because more and more bettors sign up over time.

In the meantime, more states will likely legalize sports betting and online casino gambling. Notably, the huge states of Texas and California — collectively home to roughly one-fifth of the nation’s population — have yet to make sports betting legal.

This backdrop serves as the basis for another noteworthy detail regarding DraftKings’ plausible future. That’s Goldman Sachs‘ belief that the U.S. sports-wagering industry could swell from $10 billion now to $45 billion within a few years, led by online sports betting. Given DraftKings’ existing market share and well-recognized brand name, it’s well-positioned to capture more than its fair share of this growth.

Analysts think so, anyway. These professionals say the company is likely to see revenue of nearly $7 billion in 2026 versus the $4.9 billion midpoint of this year’s guidance. Better still, DraftKings should swing back to a full-year profit next year.

But what about the threat of sky-high tax rates on sports-betting revenue? Don’t sweat it too much. Illinois’ proposed measures are aggressive to the point of being self-defeating. A handful of analysts, lawmakers, and industry insiders argue that operators would be willing to cease operations in a state before they knowingly suffer tax-related losses in perpetuity.

Rather than risking the loss of competition in the state (or the loss of an entire sliver of an industry), expectations are that more tenable taxation options are in the cards.

Buy DraftKings stock on this short-term dip

Take a step back and look at the bigger picture. First and foremost, understand that investors are still largely underappreciating the benefit of time here; the longer DraftKings is around in a particular market, the bigger and better it gets.

It matters simply because while the sports betting ban was lifted in 2018, many states didn’t legalize it for several years after that. In many cases we’re just now entering the third or fourth year of post-legalization, when profit margins start to get serious thanks to diminished spending on marketing. This is why earnings are likely on the cusp of an explosion.

The knee-jerk response to Illinois’ proposed tax on sports wagering revenue is also overblown — no matter how big that particular betting market may be. Like companies, local and state governments must also be competitive as well as accommodative. When forced to face the politically adverse impact of prohibitive taxation, they’ll likely come around. After all, some tax revenue is better than no tax revenue at all.

This might help seal the deal: Of the 37 analysts currently covering DraftKings, 28 of them rate it as a strong buy. Their consensus price target of $52.43 is also nearly 40% above the stock’s present price. They’re arguably not being distracted by the recent swell of irrelevant noise, but instead are seeing the factors laid out above.

So no, it’s not too late to buy DraftKings stock. If anything it’s a buy it at its current bargain price.