Sports Betting Stocks Get X-Mas Bump, But Is It Short-Lived?

Well, Santa was somewhat kind to sports betting stock investors, as the gaming sector saw a small bump leading into the holiday weekend. For DraftKings (NASDAQ: DKNG) stockholders, in particular, the bump was a welcome relief after the stock hit a 52-week low of $25.80 on December 17th.

DraftKings stock share prices have been on the decline since the start of the NFL season, as investors had pilled on in anticipation of the season kickoff. Trading as high as $63.67 on September 9th, share prices have been on a steady decline ever since, with investors jumping ship as the highly-touted stock has more than cut itself in half.

Now trending at -36.8% year-to-date, DraftKings has significantly underperformed in 2021, and the stock has found itself as a favorite target for short-sellers. The Dales Report has extensively covered this DraftKings short-seller saga, and it has been reported that DKNG’s short percent of float hit 12.2% as of December 15th.

While this short-selling has increased over the last few weeks, the stock has managed to maintain some sort of stability. If the stock can maintain its current position, investors could quietly pile back on at the low price and force the shorts to cover in a move that would put some wind back into the sails of the sports betting financial sector.

Growth stocks have also been on the right side of the recent Wall Street momentum shift, and this, along with recent insider investments, current price action, and increased short-selling could signify a rapidly approaching change of the tide.

It Can’t Get Any Worse… Can It?

The skids have been historic, and as any sports bettor will tell you “this trend cannot last forever.” But while we do expect sports betting stocks like DKNG to see solid increases over time, COVID is likely to have tossed gasoline on a relatively small fire.

Sports betting legislation rapidly expanded throughout the pandemic, as local governments were quick to draft gaming regulations that opened the doors for more taxable revenue sources. Lockdowns and stimulus checks put both time and money into the hands of a bored public, a combination that likely helped to convert new players who had previously been on the fence.

Hype combined with widespread political support to create the perfect environment for the young industry to flourish, and sports betting greatly benefitted from the meme-stock fever as Barstool Sports’ Dave Portnoy helped to put brands like Penn National on the radar as a hot commodity for young investors.

DraftKings stocks saw record highs through the pandemic, and this steep drop as the country appears to navigate its way out of the current situation supports the argument that the more accurate price target sits somewhere in the upper $50 – lower $60 range.

Volatility has always been a concern in this relatively young sector, with sports betting stocks responding quickly to legislative news, while also following the ebbs and flows of the annual sporting calendar. Yet, as legislative expansion slows, and with investors now having seen a greater number of financial returns from the brands leading the charge, fears mount over long-term profitability.

Covid To Impact Short-Term Gains

Sports leagues across the country are being forced to cancel games once again as locker room breakouts are leaving rosters depleted. While this is an obvious setback for the leagues, it also creates a new sort of headache for sports bettors. COVID testing protocols have created a scenario where many teams are notified of a player’s status moments before the start of a matchup.

These last-minute personnel changes have made it increasingly difficult for sportsbooks to monitor and adjust betting lines to reflect the latest news, and bettors are increasingly wary of grabbing early lines in fear of being on the wrong side of a positive COVID test.

Uncertainty has always been part of the thrill, and sports bettors have long attempted to lock in their wagers ahead of injury updates to beat the news cycle and adjusted line. Some sports, like baseball, often see sportsbooks void all bets if the schedule pitching matchup is changed, but this rule is not applied to most sporting competitions.

In essence, bettors wagering on the Green Bay Packers to cover a 7 point spread are now also betting on Aaron Rodgers’ ability to pass a Covid test as well. And given the league’s strict Covid protocol, vaccinated players are not exempt from the rules forcing them to sit out until they are able to test negative for the virus.

On-Field Uncertainties Impact Handles 

Caesars (CZR), MGM Resorts (MGM), Penn National Gaming (PENN), and DraftKings (DKNG) all managed to weather the storm, as the COVID pandemic shut down the sporting world. Their subsequent return saw sports betting stocks rise to record numbers, often coinciding with the start of a major sporting event.

During these record runs, hype and fervor were at an all-time high, and investors were keen to see just how fast these companies could prove themselves in the relatively new and young market. Some of this luster has worn off, and while few questions the massive amounts of money to be made in the space, concern exists for the excessive acquisition spending brands are tallying up to secure market share.

The exuberant spending habits, combined with Covid-related issues, have made it difficult for investors and financial analysts to more accurately set expectations for the sector.

For the majority of the country, regulated sports wagering has only existed in ‘the time of Covid,’ and operators are yet to have their first real season of action with scheduling interferences and cancellations.

Brands like MGM and Penn National also rely heavily on their land-based, brick-and-mortar operations to fuel their growth, and mounting fears of further lockdowns only look to limit the number of patrons allowed inside of their businesses and casinos for the time being. 

Sportsbooks have built-in mechanisms to protect their bottom line and to prevent them from taking a major hit on game outcomes, but no contingency plan has been put into place to prevent losses brought on from a global shutdown. With DraftKings scheduled to release their next quarterly returns just ahead of the SuperBowl, these uncertain times could further imbalance their financials, as spending is likely to increase ahead of the NY launch, and revenue takes a hit from the uncertain betting calendar.