Shares of DraftKings (DKNG) have rebounded from recent lows reached when the company reported mixed first-quarter earnings in early May. The mid-March 52-week peak had reached $74.38 before a severe backtest towards the $40 level just two months later.
The company reported a loss of $0.80 per share, versus forecasts for red ink at $0.42. However, revenue of $312 million easily surpassed estimates of $236 million, as DKNG’s monthly unique payers increased 114% compared to the first quarter of 2020.
On average, DKNG said 1.5 million monthly unique paying customers engaged with its platform each month during the first quarter of 2021. Given the strong growth and demand, the company raised its revenue outlook for the year to $1.05–$1.15 billion, up from $1 billion previously.
It is important to the note the aforementioned guidance assumes all upcoming professional and college sports events that have been announced come to fruition. Of course, this will depend on the ongoing coronavirus vaccination rollout, and the continued recovery from the pandemic.
The one fundamental problem, despite the raised revenue outlook, is that the company continues to lose money. For 2021, DKNG is expected to post a loss of $2.58 a share; for 2022, losses are expected to average $1.62.
There are currently 25 analysts who cover the stock, with five strong buy ratings, 12 buys, seven holds, and one underperform. Following the earnings miss, three brokerage firms lowered their price targets while keeping a buy rating on the stock.
The chart shows the 25% rebound of the $39.93 May 13 low, with shares currently hovering around the $50 level. This represents previous resistance from early January. Continued closes above this level would signal ongoing strength towards $52.50 and the previous low from February.
One red flag, from a technical standpoint, is that DKNG’s 50-day moving average remains in a downtrend and is on track to fall below the 200-day moving average. If the current pattern plays out, this would form a death cross, typically a bearish development for lower lows.
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If shares can recover the $52.50 level and the 200-day moving average over the near-term, this would slow the process, but it’s still something to keep an eye on. A close back below the $47.50–$45 levels could lead to some renewed selling pressure and a retest towards the recent lows.
Longer-term investors can afford to wait for DKNG to continue to build out its platform, along with its strategic investments. Additionally, as more and more states come aboard with online gambling, profitability could come sooner rather than later.
Aggressive traders can play the action by considering an option straddle, a strategy used when an investor is unsure of the near-term direction in the stock. The DKNG July 50 calls are currently going for $4 and the DKNG July 50 puts are also near the $4 level.
The total premium for both contracts would be $8 with shares needing to be above $58, or below $42, by mid-July for the trade to breakeven. Any amount above or below these levels would be profitable. If shares are above $62, or below $38, the trade would return 50% as the calls or puts would be $12 in the money.
