DraftKings Stock Flashing Possible Buy Signal

Posted on: September 4, 2023, 04:10h. 

Last updated on: September 4, 2023, 04:10h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Like other gaming stocks, DraftKings (NASDAQ: DKNG) struggled in August, but shares of the sportsbook operator gained 5.29% last week. That could be a sign of better things to come.

DraftKings stock
A DraftKings billboard appears at Times Square in New York City after the company went public in April 2020. The stock could bounce back following a rough August, according to a research firm. (Image: NASDAQ)

Some market observers argue the recent pullback by the high-flying gaming stock — it’s up 160.23% year-to-date — is healthy and could represent a buying opportunity. The recent retrenchment by DraftKings stock has been limited because the shares found technical support at an important price range, indicating it’s not in free fall.

Specifically, DKNG in the last week pulled back to its 80-day moving average after spending a significant period of time above it,” noted Schaeffer’s Investment Research. “According to data from Schaeffer’s Senior Quantitative Analyst Rocky White, five similar signals occurred during the past three years, with DraftKings stock notching a 14.6% one-month gain 80% of the time. From its current perch, a similar move would put the equity back near its Aug. 4, year-to-date high of $34.49.”

The shares closed at $29.64 last Friday, indicating that a return to the August high implies upside of 16.3%.

Catalysts, Headwinds for DraftKings Stock

Despite some upside accrued last week, August wasn’t kind to risk assets and September is often one of the worst months of the year for stocks. That seasonality could be challenging for growth stocks that are already sporting substantial year-to-date gains — a bill DraftKings fits to a tee.

On the other hand, seasonality could favor DrafKings and some peers because college football started in earnest last Saturday and the 2023 NFL season starts this Thursday. Football is the most wagered on sport in the US and the arrival of the NFL often sparks upside for sportsbook equities, albeit temporary.

“Online gaming stocks have a history of rallying into and on the start of NFL Season, though less so after,” according to a recent report by Bank of America.

Additionally, DraftKings and its rivals are expected to be live with mobile sports wagering in Kentucky this month and Puerto Rico by the end of the year, bringing new revenue-generating opportunities to the table.

Options Market Signals

While DraftKings stock lagged the S&P 500 last month, there are some potentially important clues regarding the shares’ near-term fate emanating from the options market.

“Given this lackluster technical setup, it’s no surprise short-term options traders are more pessimistic than usual,” added Schaeffer’s. “However, an unwinding of this pessimism could bode well for DraftKings stock; its Schaeffer’s put/call open interest ratio (SOIR) of 1.06 stands higher than 88% of reading from the past year.”

Additionally, DraftKings options contracts currently reside at the lower end of historical volatility readings, indicating options market participants don’t expect much near-term turbulence out of the often volatile gaming equity.