Goldman Sachs Becomes First Bank to Not Sweet-Talk DraftKings, Starts Coverage With Neutral Rating

Posted on: May 19, 2020, 10:10h. 

Last updated on: May 19, 2020, 10:33h.

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

Something unusual is happening with DraftKings (NASDAQ:DKNG) stock Tuesday: a Wall Street bank is picking up coverage of the name, but isn’t waxing overtly bullish on the daily fantasy sports (DFS) giant.

Goldman Tepid On DraftKings
DraftKings gets its first tepid analyst rating as Goldman Sachs hits it with “neutral.” (Image: Spectrum News)

Earlier today, Stephen Grambling of Goldman Sachs started following DraftKings with a “neutral” rating – a tepid endorsement of the stock relative to the first five sell-side analysts that launched evaluations of the name. Every member of that quintet has the equivalent of a “buy” or “strong buy” rating on the sportsbook operator.

Grambling’s lukewarm rating on DraftKings is largely rooted in valuation concerns. Buoyed by a flurry of positive analyst chatter, the stock is up more than 68 percent since the April 24 initial public offering, prompting Grambling to note DraftKings may have gotten ahead of itself. Still, the analyst likes the fundamentals underpinning the company.

We believe both sports betting and iGaming are poised to see accelerated consumer adoption in response to COVID-19 and subsequent social distancing protocols across sports and gaming,” said the Goldman analyst. “However, we believe valuation is largely reflective of these unique growth opportunities.

Grambling placed a $32 price target on DraftKings, which is inline with the Wall Street consensus.

Well-Positioned, But…

In endorsing DraftKings, sell-side analysts are frequently highlighting two catalysts: growth expectations for the US sports betting industry and an expected boom in iGaming or online casinos. Grambling believes the company can capitalize on those trends.

He says DraftKings can garner “outsized share of the rapidly growing” US sports betting and internet gaming market, given its existing Daily Fantasy Sports clientele of 4M and consumer preference for its app relative to competitors.”

However, the analyst notes, it could take seven years for DraftKings to reach management’s goal of a multiple of 8x earnings before interest, taxes, depreciation and amortization (EBITDA), meaning near-term upside could be limited following the stock’s run since its IPO.

The analyst suggests investors wait for a pullback – something DraftKings hasn’t materially experienced since coming public. However, the stock could be in the midst of one now. After flirting with $32 on Monday, it trades around $29.50 at this writing Tuesday.

Checking The Comps

Based on a market value of $9.9 billion, Wall Street is treating DraftKings like a high-growth internet or software stock, not a traditional gaming equity, according to Barron’s.

Some analysts believe that although those comparisons place lofty multiples on the sportsbook operator, they are nonetheless relevant, and that the investment community will continue viewing DraftKings as more of an internet/technology company, not as an old guard casino operator.

DraftKings’ business is less capital intensive than that of a brick-and-mortar gaming company, and analysts say that’s an appealing trait in today’s environment. Without major sports taking place, DraftKings is burning $15 million to $20 million a month, according to Barron’s. But some operators of land-based casinos are burning millions of dollars per day while those venues are shuttered because of the COVID-19 pandemic.