DraftKings Stock Has Big Upside Potential, Says Piper Analyst

Posted on: November 18, 2022, 12:48h. 

Last updated on: November 18, 2022, 01:19h.

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

DraftKings (NASDAQ: DKNG) stock traded modestly higher Friday amid a couple of favorable headlines, including a new bullish sell-side call.

DraftKings stock
Actor Kevin Hart in a DraftKings advertisement. An analyst is bullish on the stock. (Image: Oddschecker)

In a note to clients on Friday, Piper Sandler analyst Matt Farrell started coverage of the online sportsbook operator with an “overweight” rating and a $21 price target, which implies upside of about 41% from the November 17 close. The analyst noted that where the gaming equity currently resides could be “an attractive long-term entry point.”

Farrell’s bullish view on DraftKings arrives as the stock suffered some setbacks earlier this month. That’s after the company forecast a wider-than-expected 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) loss, prompting several analysts to trim price forecasts on the name.

With profitability expectations reset after the initial 2023 guide, we believe current levels represent an attractive long-term entry point, particularly with the risk of a future capital raise largely diminished,” wrote the analyst.

Most analysts covering the gaming equity have positive ratings on the shares and the consensus price target is close to $21.

DraftKings’ Path to Profitability

While the 2023 guidance issued by the sportsbook operator earlier this month disappointed investors, the silver lining is the investment community has more clarity on DraftKings’ pathway to profitability.

It appears the company could break even on EBITDA, or be slightly profitable in the fourth quarter of 2023. That’s pivotal at a time when some of DraftKings’ biggest rivals are closing in on the end of their money-losing ways.

“Furthermore, while we understand the profitability scrutiny in the current environment, we feel it somewhat misses the forest for the trees, as investors would likely be questioning the broader market opportunity if the company were profitable in Q4 2022,” added Farrell.

Perhaps coincidentally, the analyst’s new coverage of DraftKings arrived on the same day that Maryland finally provided a date for the debut of mobile sports betting. The state, which approved sports wagering in a 2020 ballot initiative, is one of the most widely anticipated additions to the regulated sports wagering fray. That’s because disposable income is high in the state and residents are enthusiastic about sports.

Other DraftKings Catalysts

Speaking of state-level catalysts for DraftKings stock, Piper Sandler’s Farrell noted “a steady cadence of legalization.” Massachusetts and Ohio are the marquee states readying to join the mobile sports betting lineup over the near term.

DraftKings also carved out a growing niche in the internet casino market, which is notable because that industry offers better margins than sports betting, and its long-term growth profile could prove superior as more states approve it. Farrell’s total addressable market forecast for US and Canadian sports betting and iGaming is ambitious at $80 billion.

“Overall, we recommend investors own DraftKings for exposure to the rapidly growing online sports betting and iGaming markets,” concluded the analyst.