This article was written exclusively for Investing.com
- DraftKings: a volatile stock
- Company has franchise in fantasy sports
- Gambling on sports is a growing business
- Markets liked the Golden Nugget online acquisition
- Earnings have been disappointing, but that could change
Gambling on sports is nothing new. In the US, while Las Vegas and Atlantic City had a hold on betting for decades, more and more states, searching for new revenue flows, are legalizing gambling.
Meanwhile, technology has changed the way all businesses operate. Retail companies have faced challenges from online shopping for years, and the global pandemic only accelerated the expansion of technology use to ease purchases of consumer goods and services. As an example, tech-based companies such as Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) are replacing traditional taxis, offering far more benefits, cashless payments, and other advantages.
In the world of gaming, DraftKings (NASDAQ:DKNG) is emerging as the leading online sports betting and gambling site. DKNG offers its customers betting from the comfort of their homes in states where gambling is legal. A recent acquisition added casino games to its offerings.
Moreover, DKNG has a franchise in a sector of the gambling market with which few others can compete. At $53.32 per share on Aug. 23, DKNG could be trading at a price point investors who missed out will look back at much like those that did not buy Tesla (NASDAQ:TSLA) at one-tenth the current price in 2019 or Apple (NASDAQ:AAPL) at $10 per share in 2010.
DraftKings: a volatile stock
Since July 2019, DraftKings shares have traded in a wide range, but the price trend is bullish. 
Source: Barchart
As the chart above highlights, DKNG traded from a low of $9.76 in early August 2019 to a high of $74.38 in late March 2022. At the $53 level, the price trend remains higher as DKNG has made a series of higher lows over the past two years.
Company has franchise in fantasy sports
There are choices when it comes to online gambling stocks, but DraftKings is apart from the pack. It's the company that has a lock on the fantasy sports sector.
In fantasy sports, competitors create a roster of players to represent a virtual team. The contest ends with a winner based on the best statistics, making competitors virtual owners.
DKNG offers fantasy sports products as well as a broad range of sports and other gaming. The company’s profile states:
Source: Barchart
At around $53 per share, DKNG has a market cap of just under $21 billion. An average of over 11.3 million DKNG shares changes hands each day.
Gambling on sports a growing business
Gambling on sporting events has always been popular. When it was illegal, people flocked to bookies. Las Vegas and Atlantic City became havens for those looking for action on their favorite teams or athletes. As states look for new revenue sources, gambling has become mainstream.
Meanwhile, online gaming brings action to peoples’ living rooms. Technology has brought the potential to risk money on sports outcomes for those sitting and watching games at home. Many sites, including DraftKings, offer in-game betting, so that gamblers can bet on the next pitch, at-bat, series of downs, quarter, period, or a range of other possibilities.
Technology is only enhancing the addressable market for gaming, and DraftKings is a leader. Penn National Gaming (NASDAQ:PENN) is another gaming company, but its market cap is half the size of DKNG.
More and more states are legalizing online gambling, expanding DKNG’s market. This link indicates the current states where gamblers can use DraftKings services as well as the states that have yet to legalize gaming or allow DKNG to offer their services to bettors. This list has been growing.
Markets liked the Golden Nugget online acquisition
On Aug. 9, DKNG agreed to acquire Golden Nugget Online Gaming (NASDAQ:GNOG) gaming for $1.56 billion in stock.
The deal brought five million customers into DraftKings’s ecosystem, boosting the iGaming business. Tilman Fertitta, owner of Landry's Inc. a Houston-based dining, hospitality, entertainment and gaming corporation with operations in 35 US states also owns 47% of the Golden Nugget Online shares. Fertitta, who also owns the Houston Rockets basketball franchise, will join DKNG’s board of directors.
DKNG anticipates $300 million in cost savings from the deal. The market agreed—the acquirer’s shares remained above the $50 level after the deal was announced. Many acquisitions dilute shareholder value, but the consensus view is that the deal is accretive for DKNG as it will cut costs and increase the company's addressable market and suite of products.
Earnings have been disappointing, but that could change
DKNG missed analyst earnings estimates over the past four consecutive quarters.
Source: Yahoo (NASDAQ:AABA) Finance
The chart shows the less than stellar earnings record for DKNG.
Chart: Investing.com
Meanwhile, an Investing.com survey of 26 analysts has an average price target of $70.74 per share for DNKG, with forecasts ranging from about $42.50 to $102 per share. Of the analysts polled, 19 gave it an 'Outperform' rating.
Investor’s Business Daily notes that on Aug. 6, the company reported better-than-expected EPS and revenue figures. After losing $3.95 per share in 2020, the company is expected to lose $2.52 in 2021 and $1.62 per share in 2022. IBD says that DKNG is “on the road to profitability.”
Tilman Fertitta is a smart operator. His presence on DKNG’s board will yield benefits for the company, where he is now a significant shareholder.
In my view, DKNG is a Tesla type of investment as the Boston-based gambling company moves from losses towards profitability. Gaming is a growing business, and DKNG has a franchise in fantasy and an increasing addressable market as more states legalize gambling. The accretive acquisition of Golden Nugget online is another potentially profitable feather in DraftKing’s cap.
Gambling is always risky. When it comes to DKNG, its growing business could lift DKNG's market cap by ten times over the coming years, making the stock a potential ten-bagger. I own DKNG shares and would add to my long position on any price weakness.