DraftKings Stock Could Be Post-Earnings Rebound Play

Posted on: July 29, 2021, 12:08h. 

Last updated on: July 29, 2021, 03:06h.

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

Residing 32 percent below its March highs, DraftKings (NASDAQ:DKNG) stock isn’t the scintillating name it once was. But some market observers believe the online sportsbook operator can get its momentum back.

DraftKings stock
Staffers walk past the DraftKings sign at the company’s Boston headquarters. DraftKings’ stock can rebound from recent lethargy, says a research firm. (Image: CNBC)

Ahead of the company’s Aug. 6 earnings report, there are signs the stock is perking up. From its July lows around $42, DraftKings rebounded to just over $50 today and is higher by 3.62 percent over the past week. Should the shares continue grinding higher, short sellers may be forced to cover — a relevant point, because plenty remain involved with the gaming stock.

A short squeeze could help DKNG reclaim some of these recent losses. Short interest fell nearly 12 percent in the two most recent reporting periods, yet the 30.24 million shares sold short accounts for 9 percent of the stock’s total available float,” according to Schaeffer’s Investment Research.

While DraftKings stocks and other online gaming names are struggling this year, Wall Street remains mostly bullish on the shares. For example, Morgan Stanley recently said the company can capture up to a quarter of the North American iGaming and sports betting markets, highlighting it as an attractive secular growth story. The shares need to jump approximately 40 percent to reach the consensus price target.

Earnings Could Move DraftKings Stock

It remains to be seen if the Aug. 6 earnings update will positively affect DraftKings stock.

In May, the Boston-based company lifted its 2021 revenue forecast to $1.05 billion to $1.15 billion from prior estimates of $900 million to $1 billion.

However, that estimate is now baked into the shares, indicating the operator likely needs to raise that guidance to get investors excited. That’s possible, but in its brief history as a publicly traded firm, DraftKings’ earnings track record is spotty.

“In recent history, DKNG has not fared well on the earnings front. In fact, DraftKings missed expectations on all four of its most recent earnings reports,” notes Schaeffer’s. “However, two of those post-earnings reactions were to the upside; a 6.4 percent pop in February and a 3.9 percent rise in November.”

Reasons to Like DraftKings Stock

Much of investors’ enthusiasm for DraftKings revolves increasing state-level legalization of internet casinos and sports betting, and the subsequent revenue boost that comes along with a more hospitable revenue environment. Indeed, the company’s top line is rapidly expanding. But that comes at a cost.

“The growth potential is massive for DraftKings. The company is already expanding at a rapid rate, with revenues up approximately 340 percent since fiscal 2017,” says Schaeffer’s.

However, the digital sports entertainment company is still far away from profitability, with trailing 12-month net income coming in at a jaw-dropping -$1.12 billion,” Schaeffer’s continued.

On the plus side, DraftKings has $2.82 billion in cash, more than double its $1.33 billion in debt. Additionally, the company is expanding beyond its core businesses, showing a willingness to acquire media properties and expand into digital assets, among other ventures.