On paper, the narrative for sports betting firm DraftKings (DKNG) seems rather compelling. True, DKNG stock has struggled this year, posting a 30% loss since its January opener. However, over the trailing month since the close of the Aug. 10 session, shares have veritably skyrocketed over 69%. Yet bearish traders seem unconvinced and the granularity of its recent quarterly report points to problems within the consumer economy.
Nevertheless, on the front of things, the fundamentals suggest a positive outlook for DKNG stock. Heading into DraftKings’ second-quarter report, covering analysts anticipated that the company would post a loss of 87 cents per share. However, the gambling firm beat expectations with a loss of 50 cents per share. This tally also compared favorably to the year-ago loss of 76 cents.
Additionally, on the top line, DraftKings rang up sales of $466.19 million, surpassing the consensus estimate by nearly 6.4%. Further, the latest revenue tally compares favorably to Q2 2021 sales, which were $297.61 million.
A day before the Aug. 5 quarterly release, DKNG stock closed at $16.36. When the opening bell later rang out, shares gapped up to $17.84. They haven’t really looked back since, with DKNG finishing at $19.35 on Aug. 10.
Still, the pessimists are anticipating that the rally is near to being overstretched.
DKNG Stock Tops for the Most Unusual Trading
When the books closed for the midweek session, DKNG stock ranked at the top of the list for unusual options activity. However, stakeholders won’t be particularly happy with the status as the bears dove into the security’s put options, which natively have downward implications.
Specifically, traders moved in on the $18 puts featuring an expiration date of Aug. 26, 2022. Based on Wednesday’s close, DKNG stock will need to decline 7% to be at the money within 16 calendar days. Volume reached 9,922 contracts against an open interest reading of 117.
Interestingly, the bid-ask spread as represented by the midpoint price (63 cents) was 4.76%, which is contextually tight for a fast-moving security. Mainly, the narrow spread indicates high liquidity for the trade among bulls and bears. However, it also suggests greater confidence in the market maker placing the transaction.
To be fair, market participants who take the bearish bet against DKNG stock are doing so somewhat against the tide. Barchart.com reveals that DraftKings, against a basket of technical indicators, represents a weak buy.
On the other hand, DraftKings features a put/call open interest ratio of 0.91, which suggests more people are buying puts than calls. Generally speaking, a reading of 0.70 is the threshold between bullish and bearish implications.
Consumer Economy Concerns Pose Challenges
Another factor to consider when assessing the viability of DKNG stock is the consumer economy. With inflation still high – even with the latest data indicating modest improvement – people are less likely to risk their money in games of chance.
Notably, DraftKings’ loss from operations in the six months ended June 30, 2022 came out to be $824.5 million. This tally compares unfavorably to the $646.3 million loss for the year-ago period, or a magnitude difference of about 46%.
On the monetary front, in the first half of 2021, the dollar lost 3.66% of purchasing power. In the second half of 2022, the greenback shed 5.34%, the delta between the two being approximately 28%. Fundamentally, then, consumers appear to be feeling the heat of inflation, thus significantly curtailing gambling – or specifically sports betting – activities.
Further evidence of this apprehension for games of chance can be noticed in Wynn Resorts (WYNN) latest Q2 earnings report. For the company’s Las Vegas unit, casino-related sales represented 24% of total operations. This was a noticeable dip from Q2 2019’s result, where casino sales represented 26% of total operations.
In other words, even during the pre-pandemic years, Americans preferred the experience of going to casinos rather than engaging in actual gambling. This narrative has worsened from the perspective of DraftKings following the pandemic and its associated ills (such as inflation), thus boding rather poorly for DKNG stock.
Risky Either Way
While the granular fundamentals may not present the brightest picture for DKNG stock, the reality is that this security is a fan favorite. At any moment, for any reason, shares could fly higher. Therefore, bears place money into their pessimism at great danger.
Nevertheless, the arbiter of DraftKings’ trajectory could very well be the consumer economy. Unless this sector improves noticeably, traders will naturally be skeptical about DKNG stock.
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