DraftKings is on Sale

In a relative sense, DraftKings (NASDAQ:DKNG) stock is on sale. Shares peaked at nearly $75 in March, only to fall after the earnings report posted on May 7. Two headwinds plague the stock: a loss of momentum and the reality of the quarterly results.

In the last quarter, DKNG almost doubled its pro forma revenue, helped by new state launches in Michigan and Virginia. It will drive future growth by innovating content in online gaming. The over $1.1 billion in convertible notes will not dilute shareholders, bolstering its balance sheet.

Investors reacted poorly to the cash raise and user growth. The social functionality of the app impresses shareholders. It should sustain growth. But valuations are still unfavorable. Besides, when the stock is already a multi-bagger return since last year, those buying the stock now face risks. The multiples may easily compress to account for future risks ahead.

DraftKings does not have as strong a moat as investors may assume. More players are entering the market and will pressure this firm. DKNG will have to invest more in the product, increase ad spend, and negotiate on unfavorable terms. To offset those risks, investors cannot buy a big position in the stock at current levels.

Hold DKNG stock, knowing the risks/reward profile is not as great as before.