Here’s Why Alger Remains Optimistic in DraftKings (DKNG) Despite its Poor Q2 Performance

In the Q2 2021 investor letter of Alger, the fund mentioned DraftKings Inc. (NASDAQ: DKNG), and discussed its stance on the firm. DraftKings Inc. is a Boston, Massachusetts-based sports betting company, that currently has a $20.8 billion market capitalization. DKNG delivered a 11.73% return since the beginning of the year, while its 12-month returns are up by 64.57%. The stock closed at $51.59 per share on August 06, 2021.

Here is what Alger has to say about DraftKings Inc. in its Q2 2021 investor letter:

DraftKings is an online gaming operator. Its legacy Daily Fantasy Sports (DFS) allows users to virtually draft teams of players from professional sports leagues and potentially earn a payout based on how athletes perform. DraftKings Online Sports Betting (OSB) involves the company taking wagers or bets from customers on sporting events. The company’s third offering, Online Casino (iGaming), involves customers betting real money when playing
casino games like slots and blackjack online.

DFS is legal in most states, while approximately 25% of the country’s population has access to OSB and approximately 10% has access to iGaming. Within a year, we expect approximately 40% or more of the population to have access to OSB as legalization moves rapidly.

The company reported a strong quarter, with revenues exceeding expectations by more than 30%. We think the stock underperformed due to the time period between the conclusion of March Madness and the start of the NFL season being a weaker betting period and concerns about more intense competition. Concerns around tough comps have also hindered performance of DraftKings shares. We note that monthly state data continues to be robust, showing no signs of slowing from reopening. We also believe DraftKings is increasing its potential to gain market share by moving its tech-platform to SBTech, which is a sports betting platform the company acquired as part of a SPAC deal. Legalization of sports betting by states has also been robust.”

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Based on our calculations, DraftKings Inc. (NASDAQ: DKNG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DKNG was in 43 hedge fund portfolios at the end of the first quarter of 2021, compared to 48 funds in the fourth quarter of 2020. DraftKings Inc. (NASDAQ: DKNG) delivered a 15.11% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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