DraftKings Endures Spate of Bearish Price Target Revisions

Posted on: November 7, 2022, 05:17h. 

Last updated on: November 7, 2022, 07:16h.

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

Monday was the first trading day following DraftKings’ (NASDAQ:DKNG) issuance of disappointing 2023 guidance. Sell-side analysts took the opportunity to slash price targets on the sportsbook operator.

Price Target
DraftKings stock highlighted at the Nasdaq market site in New York. At least seven analysts cut price targets on it today. (Image: Twitter)

The week started with at least seven analyst paring price objectives on shares of the gaming company. That after the stock suffered its worst intraday loss on record last Friday, tumbling nearly 28%. DraftKings is forecasting an EBITDA loss of $475 million to $575 million next year, far worse than the consensus estimate of $426 million, and that outlook stoked the Nov. 4 selloff in the stock.

Compounding DraftKings’ woes is the point that some rivals have either notched profitable quarters or are close to doing so. In fact, several of the operator’s marquee competitors would likely be profitable in the current quarter if not for some unusually large wagers on the World Series that went against the books.

Despite the rampant price target cutting pertaining to DraftKings today, the stock jumped 4.33% on volume that was more than 50% above the daily average. The shares are off 57% year-to-date.

Inside the DraftKings Price Target Reductions

Even with the spate of bearish price target revisions today, DraftKings stock could offer substantial upside from its closing price of $11.80.

Barclays analyst Brandt Montour cut his price objective on DraftKings to $15 from $18 while maintain an “equal weight” rating. Deutsche Bank’s Carlo Santarelli went to $14 from $16 while keeping a “hold” view on the gaming stock. Cowen analyst Stephen Glagola believes the stock can more than double, but that’s after revising his forecast down to $25 from $35. Roth Capital analyst Edward Engel, previously a staunch DraftKings bear, still rates the shares “buy”, but trimmed his price target to $15 from $25.

Yet DraftKings continues to ignore the market’s plea for more capital discipline, and is seemingly unfazed by its dramatic increase in cost of capital year-to-date,” he wrote in a note to clients today. “Achieving positive free cash flow without requiring an equity raise is still a catalyst we see for DKNG, but it might require a “cost realignment,” like so many tech peers.”

Among the higher remaining DraftKings price outlooks are $28, down from $32 from Canaccord analyst Michael Graham, and $27 from $31 courtesy of Guggenheim’s Curry Baker. Graham said he’s impressed with DraftKings’ third-quarter executions and surprised the stock sold off so dramatically last Friday.

Craig-Hallum analyst Ryan Sigdahl reduced his DraftKings price objective to $21 from $30 while continuing to rate the stock a “buy.”

DraftKings Cash Issues

DraftKings’ capital needs are a good/news bad scenario. The company continues telling analysts and investors it won’t need to raise additional cash via dilutive share or debt sales. But it’s also not fully clear exactly what the company’s cash needs are to adequately execute its business model.

“Frustratingly, management has not guided the minimum cash needed to run the business; however, based off cash/revenue ratios for global iGaming peers, we estimate ~$300-350M still offers flexibly. While we believe DKNG can avoid raising capital, a cost reduction plan seems more likely than an equity raise at today’s stock price,” added Engel.

The analyst noted the gaming company’s fixed costs could be as high as $900 million next year, but growth of that figure should slow in the years ahead.