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New York May Legalize Online Gambling, Should You Bet on DraftKings?

New York state may legalize online sports betting, which would be boon to DraftKings (DKNG), but the The stock is currently trading at a high valuation. Should you invest ?

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This story originally appeared on StockNews

DraftKings Inc. (DKNG - Get Rating), which was up over 5% today due to news that the state of New York may legalize online sports betting, finished the day with a 3.8% loss, at $48.94, as investors took profits off the table. The stock is up a whopping 357% year-to-date.

via StockNews

DKNG is a digital sports entertainment and gaming company. The company provides users with fantasy sports, sports betting, and iGaming opportunities and is also involved in the design and development of sports betting and casino gaming platform software for online and retail sportsbook and casino gaming products. While the company has a lot of potential, its Price to Sales ratio of 41.3 is considerably high, especially compared to the S&P 500’s 2.7.

The question many investors have is it worth buying at its current price. Wall Street analysts have different views on the stock. Needham analyst Brad Erickson has a $70 price target, while J.P. Morgan initiated coverage with a “Neutral” rating and a $48 price target. J.P. Morgan’s position is that the company may not have room for more expansion due to increasing competition, slowly moving legalization and high price.

On the other side, Erickson believes there is plenty of room for upside, as Needham projects sports betting could grow into a $58 billion industry stateside. There are also mixed views from other analysts. According to the StockNews price target feature, 16 analysts rate the stock a “Strong Buy,” and 9 have it as a “Hold.” The average price target from 22 of the analysts is $60.27, with a low of $39 and a high of $100.

DKNG’s stock has been trending up recently after voters in three states, including Louisiana, Maryland, and South Dakota voted to legalize wagers on sporting events. This makes 24 total states that allow this type of betting. The company also finalized a deal with Foxwood Resorts Casino in Connecticut, even before sports betting is legalized in the state.

In mid-November, DKNG reported strong third-quarter results. Its revenue shot up 98% year over year, driven by its merger with Diamond Eagle. The return of major sports, including the NBA, MLB, NHL, and the start of the NFL season, also contributed to its top line due to strong customer engagement. Even before sports resumed, the company held strong as people betted on other events such as esports.

The company also reached a milestone in the quarter as it surpassed one million monthly users. DKNG revised its full-year guidance from a range of $500 million to $520 million to a range of $540 million to $560 million. It also now expects revenue of $750 million to $850 million for 2021.

Once the virus is behind us and we go back to a full calendar year of sports, DKNG’s revenue should see even higher gains. Fantasy sports has grown immensely over the past couple of decades, and DKNG is a pioneer in the industry.

In more good news for the company, Canada’s Department of Justice decriminalized single-event sports betting. This would allow provinces in Canada to issue licenses to companies that accept bets on sporting events, with the exception of horse racing. This provides the potential for billions of dollars in revenue should DKNG expand into Canada. 

In terms of its balance sheet, the company had $1.1 billion in cash at the end of the quarter and no long-term debt. This will allow the company to increase its marketing budget and expand its operations.

The stock is rated “Neutral” in our POWR Ratings system. While I believe the company has more room to grow over the next few years, its current price is a tad high for my liking.

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DKNG shares fell $0.05 (-0.10%) in after-hours trading Wednesday. Year-to-date, DKNG has gained 357.38%, versus a 15.61% rise in the benchmark S&P 500 index during the same period.