DraftKings Sparks Canaccord Support, Analysts Encouraged by Q3 Update, See Faster Probability

Posted on: October 8, 2020, 11:07h. 

Last updated on: October 8, 2020, 12:01h.

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

DraftKings (NASDAQ:DKNG) stock is faltering again today, extending a weekly decline to more than nine percent. But it continues earning kudos on Wall Street, as Canaccord Genuity praised the company’s recent third-quarter update.

DraftKings Stock
Canaccord analysts Michael Graham and Maria Ripps are bullish on DraftKings and see profitability arriving in 2023. (Image: Barron’s.)

Analysts Michael Graham and Maria Ripps said in a note to clients today that DraftKings’ marketing spending is encouraging. They added the US internet casinos and sports wagering markets are “developing into a much bigger opportunity.”

We expect DraftKings to respond to these dynamics with more conviction around marketing spend, and are adjusting our outlook for a deeper earnings before interest, taxes, depreciation and amortization (EBITDA) trough, followed by slightly faster profitability (now in 2023) than we previously modeled,” said the analysts.

The 2023 time line to turning profits isn’t outlandish, as it’s in line with other sell-side views, though some on Wall Street speculate DraftKings could cease losing money as soon as 2022. Earlier this week, the company forecast third-quarter revenue of $131 million to $133 million while telling investors it spent $200 million to $210 million on marketing costs during that period.

Graham and Ripps reiterate a “buy” rating and a $65 price target on the stock, implying upside of about 22.6 percent from Wednesday’s close. That forecast is based on 23x the analysts’ 2022 revenue estimate.

Outlook Remains Bright

Weighing on DraftKings stock this week is news that the company is selling as many as 20.8 million new shares of equity, while early investors are parting with another 16 million, causing a substantial influx of new supply. The company could raise up to $1.08 billion as a result.

Still, Wall Street remains largely undaunted in the view that DraftKings is going to be a long-term winner. Along with the bullish commentary from Canaccord, Jefferies lifted its price forecast on the sportsbook operator to $67 today. Additionally, the OSB Monitor published by Graham and Ripps confirms DraftKings is gaining share in some marquee markets.

The analysts say the operator is the leader in Indiana, gaining share in Iowa, already commands a quarter of the Pennsylvania online sports wagering market despite licensing delays, and is a “firm second place in New Jersey with ~30 percent share.”

DraftKings is also live in Colorado and Illinois, among other states. In the case of those two, they are new entrants to the sports betting arena, but data supports the states’ status as a pair of “must-haves” for sportsbook operators.

Long-Term View

Graham and Ripps say DraftKings has the right ingredients to deliver upside for investors over longer holdings periods.

“Longer term, we see DraftKings persisting as a leading player owing to the company’s focus on technology and platform development that should translate into a superior product and player loyalty and an aggressive customer acquisition strategy within prudent return on assets guide rails,” said the analysts.

The duo believes DraftKings’ efforts are widely supported by investors, and that the company has the added advantage of not having to direct financial resources to a legacy business, such as a brick-and-mortar casino.