DraftKings (DKNG) Could Hit New Highs

DraftKings Inc. (DKNG) stock fell from grace in October, dropping more than 50% in less than four weeks after posting an all-time high in the mid-$60s. The stock has been on the recovery trail since that time, recouping about two-thirds of those losses. The steep decline wasn't surprising because the company is still mired in red ink despite 43% year-over-year revenue growth, inducing many analysts to post cautionary comments about valuation.

Key Takeaways

  • DraftKings stock hit an all-time high in October and sold off more than 50%.
  • A bounce into January has settled in the upper half of a broad trading range.
  • Sports betting legalization in New York could lift the stock to a new high.

However, this is January, and investors are looking toward a brighter future when sports stadiums are crowded with spectators once again and televised events don't draw low ratings due to the unsettling experience of cardboard fan faces. In addition, legislators in Canada and New York are finding the time to debate legalized sports betting, while a recent report suggests that Texas will address legalization soon. Given these positives, DraftKings stock could find its way to new highs in the first quarter.

JPMorgan analyst Daniel Politzer summed up mixed sentiment in December, initiating coverage on DraftKings stock with a "Neutral" rating and $48 price target while noting major positives that include "(1) its position as a leader with scale advantages in the fast-growing U.S. sports betting/iGaming industry, (2) proprietary survey work indicating that U.S. sports bettors are fairly sticky (once acquired) and also that DKNG is the most preferred OSB (online sports betting) platform, and (3) DKNG's roots as a leader in daily fantasy sports."

Broader Wall Street consensus on DraftKings stock is mixed as well, with a "Moderate Buy" rating based upon 11 "Buy" and five "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $39 to a Street-high $100, while the stock is set to open Wednesday's session more than $11 below the median $64 target. This humble placement could easily support a rapid advance into the October peak in the $60s.

Quarterly revenue growth is an increase in a company's sales in one quarter compared to sales of a different quarter. The current quarter's sales figure can be compared on a year-over-year basis (e.g., third-quarter sales of year one compared with third-quarter sales of year two) or sequentially (third-quarter sales of year one compared with fourth-quarter sales of year one).

DraftKings Daily Chart (2019–2020)

Chart showing the share price performance of DraftKings Inc. (DKNG)

The company officially came public at $10.80 in December 2019 and entered a strong advance, topping out at $19.50 during the first week of March. It then fell 46% in six sessions, slicing through the IPO opening print before finding support just above $10.00. The stock settled near that level for a few weeks and turned sharply higher, returning to the prior high at the end of April. A momentum-fueled breakout posted impressive gains, reaching the mid-$40s in June.

The stock rallied above that barrier in September, posting an all-time high at $64.19 in early October and turning sharply lower into the month's end. The decline violated 50-day exponential moving average (EMA) support in the mid-$40s, while the subsequent recovery wave remounted that level in November, ahead of two successful support tests into January. Price action since that time has lifted to seven-week range resistance in the low to mid-$50s.

The on-balance volume (OBV) accumulation-distribution indicator has lagged behind price action since November, indicating that short-covering provided the primary fuel for the recovery wave. As a result, legitimate catalysts may be needed to attract committed buyers, raising the odds for a trading range, rather than directional tape. New York could be the key here, given the immense revenue potential, with legislators set to debate a legalization bill just sent to the New York Senate floor.

Short-covering refers to buying back borrowed securities in order to close out an open short position at a profit or loss. It requires purchasing the same security that was initially sold short and handing back the shares initially borrowed for the short sale. This type of transaction is referred to as buy to cover.

The Bottom Line

DraftKings stock has recovered from a steep fourth-quarter decline but may need a sports legalization wave to hit new highs.

Disclosure: The author held DraftKings shares in a family account at the time of publication.

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