DraftKings Stock not Getting Credit it Deserves, Says Citi Analyst

Posted on: December 16, 2022, 04:25h. 

Last updated on: December 16, 2022, 05:41h.

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

Coming off a 13.55% loss this week that extends its year-to-date slide to 54%, DraftKings stock is undoubtedly frustrating investors. One analyst sees opportunity amidst the carnage.

DraftKings stock
Citi analyst Jason Bazinet (right) in an April interview with CNBC. He’s bullish on DraftKings stock. (Image: CNBC)

In a note to clients today, Citi analyst Jason Bazinet said markets aren’t giving the gaming company enough credit for its march toward profitability, and that risk/reward is attractive in shares of the online sportsbook operator.

We remain optimistic and are buyers at current levels. We continue to view the company’s risk-reward as compelling and maintain our Buy rating and $24 target price,” wrote the analyst.

That $24 price forecast implies the stock can nearly double from today’s closing price of $12.12. Since the start of the fourth quarter, the shares are off 32.1%.

DraftKings Stock Could Require Patience

Last month, DraftKings forecast a 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $475 million to $575 million next year, well ahead of the consensus estimate of $426 million on revenue of $2.8 billion to $3.0 billion.

Though the gaming company noted it could be EBITDA positive in the fourth quarter of next year, two days later the stock suffered its worst intraday loss on record. However, Citi’s Bazinet says markets may be too pessimistic regarding DraftKings’ prospects, noting management said it drove customer acquisition costs lower by 10% this year.

“The market appears to be more skeptical about the firm’s long-term prospects. We remain optimistic and are buyers at current levels,” according to the analyst.

Bazinet added that on its current trajectory, DraftKings could reach long-term objectives by 2033. How patient investors are willing to be is a different story, particularly as rivals Barstool Sportsbook, BetMGM, and Caesars Sportsbook are nearing profitability. FanDuel, the largest online sportsbook operator, could be profitable on an annual basis for the first time in 2023.

Regulatory Environment and DraftKings Stock

At the end of the third quarter, DraftKings offered mobile sports betting in 18 states, covering 37% of the US population. In 2023, the operator and its rivals could be boosted by the arrivals of Maryland, Massachusetts, and Ohio to the online sports wagering scene.

“If legalization trends continue at the 2018-2021 cadence, we would expect DraftKings to reach its long-term targets by 2033,” said Bazinet.

At its investor day last month, FanDuel noted that by 2030, online sports wagering will be legal in enough states to cover at least 80% of the US population. Though the gaming company didn’t get into specifics, that projection likely assumes the arrival of California, Texas, or Florida — or all three — into legal sports betting arena.

Over the medium-term, there’s some legislative momentum for mobile sports betting in Texas. But California and Florida are different ballgames because of the presence of tribal casino operators in those states that are fighting to ward off outside competition. That makes forecasting a year in which those states will approve mobile sports betting murky at best.