DKNG Stock: Other Gambling Stocks May Make for Better Buys

As I discussed in my last article on DraftKings (NASDAQ:DKNG) stock, two things could further sour sentiment on sports betting stocks.

First, as it is possible the U.S. Federal Reserve is forced to take more drastic action (i.e. a big initial rate hike) to combat inflation, richly-priced growth stocks, many of which are sports betting stocks, could continue to drop.

Second, in the eyes of the market, legal sportsbooks are looking less like a license to print money. Investors seemed to ignore this in 2020 and for most of 2021. But now, they’re catching up quickly.

As both these issues carry on in the months ahead, we could see further declines not just for DKNG, but other sports betting stocks, as well. However, it is possible that it gets to a point where this sector, shifting from in-favor to out-of-favor, becomes oversold.

If that day arrives, it may be a prime opportunity to scoop up names that end up in the bargain bin. Even so, other names may make for better wagers.

Why DraftKings isn’t Your Best Bet

So, let’s say my thesis discussed above plays out. Rate hikes and more industry-specific reasons lead to another big drop for iGaming and sports betting stocks. As a result, it will send them to more than reasonable prices.

Sure, based on the latest bullish coverage of it, for example, a recent upgrade from Morgan Stanley’s Thomas Allen, it may seem like DKNG stock would be a great play if the cycling out of this sector becomes overdone.

With its leading market share plus new U.S. states opening up for legal sports betting, some believe its potential is underappreciated at around $23 per share today. That will definitely be the case if it falls down to $10 – $15 per share.

If a big drop ends up happening, DKNG may have a decent amount of upside potential. Still, I believe more opportunity may lie in sports betting stocks that are not pure plays like DraftKings, Rush Street Interactive (NYSE:RSI), and others.

Instead, the best buys following another meltdown may be the ones that have both land-based and online properties. Prime examples include Caesars Entertainment (NASDAQ:CZR) and MGM Resorts (NYSE:MGM).

DKNG Stock vs. Diversified Gambling Stocks

Why go with these other names instead of DraftKings? Diversified gambling companies like Caesars, MGM, and Penn National Gaming (NASDAQ:PENN) may have an easier time making their respective platforms profitable. Mainly, this is due to the revenue synergies that come from operating both casinos and sportsbooks, not just the latter.

For example, players on either Caesars or MGM’s apps can redeem rewards points for more than just free bets. Caesars Rewards points earned on the company’s sportsbook app can be used to pay for excursions to the company’s Las Vegas and regional properties. It is the same thing with MGM’s BetMGM app and its rewards program. The ability to offer this brings many advantages.

First, it may enable each of them to wrap up building a “sticky” player base much sooner. This may mean each one will be able to reduce customer acquisition costs well before DraftKings. Second, by incentivizing players to use their rewards points for casino excursions rather than on free wagers, Caesars and MGM could each improve the performance of their in-person gambling properties. Third, this program could attract more millennials and Generation Z to land-based casinos. So far, these younger cohorts have shown an interest in sports betting apps, but less interest in traditional casino gambling.

In short, the legacy gambling companies are well-positioned to make the sports betting megatrend work for them. Even if the platforms end up being loss leaders, it could still give each one an overall boost.

DraftKings, on the other hand, has far fewer revenue synergy opportunities. This may leave it dependent on having to continue spending heavily to maintain its market share. In turn, this would make it much harder for it to get out of the red.

Play With Incumbent Gaming Stocks Instead

If the pullback in gambling stocks continues, each one could go from overvalued to trading for fair value, or perhaps even become undervalued. Yes, a similar thing could happen here with DraftKings. Another big plunge could send it to a more reasonable entry price.

Yet, while you can make the case that its profitability issues will improve, this online-only operator may face more hurdles getting out of the red.

In contrast, the hybrid (land and online) casino companies could make up for the bookmaking industry’s low margins and high state taxes by using their sites as a driver of more business for their legacy properties.

Bottom line: Incumbent casino stocks may offer greater upside potential than DKNG stock. Keep this in mind if you decide to go contrarian on this sector and if the space falls more out of favor over the next few months.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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