DraftKings Inc. (DKNG) shares traded above $60 for the first time in four months on Tuesday, one week after Goldman Sachs added to a wave of positive commentary, upgrading the sports betting portal to "Buy." The stock has been on a roll since bouncing at the 200-day exponential moving average (EMA) in November, lifting more than 70%, and is now trading just below October's all-time high, setting the stage for a breakout attempt.

Key Takeaways

  • DraftKings stock has nearly completed a 60-point round trip into October's all-time high.
  • A favorable legislative environment is underpinning buying interest.
  • The company reports earnings on Feb. 26.
  • A bearish volume divergence lowers the odds for a breakout in the first quarter.

The company has reported strong revenue growth in the past three quarters but has failed to turn a profit, keeping many investors on the sidelines. It now expects to book $750 million to $850 million in fiscal year 2021 revenue but still isn't projecting positive cash flow. Of course, the pandemic has had a negative impact on the intermediate outlook, with many sporting events cancelled or contained within sterile bubbles.

DraftKings just opened operations in Virginia, marking the 12th state in which the sportsbook is available. The New York legislature is now debating legalized sports betting, while Michigan took the plunge in January. The passage of a New York bill could put pressure on other states, hitting a critical mass after decades of resistance. Competition is increasing at the same pace as opportunity, with rivals that include Barstool scooping up big chunks of market share.

Goldman analyst Stephen Grambling upgraded DraftKings stock last week, commenting, "We upgrade DKNG to Buy as we expect ongoing sales beats vs. consensus driven by 1) sustained market-leading position in new and existing markets, 2) ability to participate in the economics of single-operator states, and 3) presence of national partnerships that should allow them to accelerate growth and achieve scale sooner than the broader peer group. We continue to see DKNG – along with Penn National Gaming, Inc. (PENN) – as having the greatest optionality to drive a network effect which we expect to be accompanied by an upward valuation."

Wall Street consensus on DraftKings stock has improved in the past three months, yielding an "Overweight" rating based upon 18 "Buy," 1 "Overweight," 8 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $41 to a Street-high $100, while the stock is set to open Wednesday's session just below the median $61 target. Price action could easily cover the distance into the fourth quarter peak with this mid-range placement.

Tip

Critical mass is the point at which a growing company becomes self-sustaining and no longer needs additional investment to remain economically viable. It is a crucial stage in the development of a growing company. It is the point at which the business becomes profitable enough to continue growing by itself and no longer requires investment from outsiders.

DraftKings Daily Chart (2019 – 2021)

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

TradingView.com

DraftKings was created in December 2019 through the merger of the former company with Diamond Eagle Acquisition and SB Tech. The stock rallied to $19.50 in March 2020 and turned tail, dropping to $10.60 less than two weeks later. It returned to the high in April and broke out, entering a momentum-fueled advance that stalled in the $40s in June. A rounded correction into September yielded a secondary uptrend that posted an all-time high at $64.19 in October.

The stock dropped like a rock into November and bounced at deep support, recouping more than 25 points into this morning's opening print. Unfortunately for bulls, the on-balance volume (OBV) accumulation-distribution indicator has failed to keep up with price action, retracing just half of the fourth quarter selling wave. This bearish divergence greatly lowers the odds for a sustained breakout while raising the odds for a "sell-the-news" reaction after the Feb. 26 earnings report.

Tip

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.

The Bottom Line

DraftKings stock has nearly completed a round trip into October's all-time high, just three weeks ahead of the company's fourth quarter 2020 earnings release.

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