DraftKings Has Reasons to Be Cautiously Optimistic, Says Analyst

Posted on: March 24, 2023, 04:14h. 

Last updated on: March 24, 2023, 04:22h.

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

Coming off a modest weekly loss, but still up 55.66% year-to-date, DraftKings (NASDAQ: DKNG) stock has reasons for investors to be cautiously optimistic, but the shares could tread water over the near term following the sizable jump to start 2023.

DraftKings
A DraftKings billboard appears at Times Square in New York City after the company went public in April 2020. An analyst sees reasons to like the stock. (Image: NASDAQ)

That’s the take of Deutsche Bank analyst Carlo Santarelli who, in a new report to clients, reiterated a “hold” rating on the online sportsbook operator with a $15 price target, well below Friday’s closing price of $17.73.

While the stock is likely to ebb and flow with quarterly results and bigger-picture equity and igaming-market news flow, we see shares as largely range-bound for the time being,” noted Santarelli.

The analyst’s $15 price forecast on DraftKings stock is well off the Wall Street average of $24.02, and he’s one of 11 analysts rating the shares “hold.” Three call it a “sell,” while 18 have the equivalents of “strong buy” or “buy” grades on the gaming name.

DraftKings’ Focus on Cost Reductions Commendable

Sports wagering stocks are currently in focus due to the NCAA Tournament — one of the most bet on events in the US — but when it comes to DraftKings, the points of emphasis for analysts and investors is the company’s ability to contain costs and reach profitability in 2024.

In February, Boston-based DraftKings boosted the midpoint of its 2023 revenue outlook to $2.95 billion from $2.9 billion while boosting the midpoint of its projected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss to $400 million from $525 million. The company said it’s targeting EBITDA profitability in 2024.

That objective will be helped by efforts to trim marketing and promotional costs, which “will go a long way toward narrowing the goalposts around the range-of-outcomes debate,” added Santarelli.

The analyst also highlighted several potential catalysts for DraftKings stock, including internet casino and sports betting market share gains. Those factors are enhanced by some rivals dialing back spending, and DraftKings’ internal focus on sharpening customer acquisition and retention programs.

Promotional Spending Trending Lower

After profligate spending in 2020 and 2021 in the name of attracting clients, it appears online sportsbook operators, including DraftKings, are eschewing that approach and turning their focus to running profitable businesses.

While promotional extraction is an undoubted positive, now that the market better understands the frivolous nature of gross gaming revenue (GGR) and total addressable market (TAM) derived from GGR, there are implications from the changing behavior. For example, we believe the extraction of promotions is one of the main drivers of the slowing handle growth,” wrote Santarelli.

He’s just one analyst, but those comments are noteworthy because he’s long been a critic of handle and TAM being metrics for evaluating sports betting equities.

Santarelli added that while there will likely be bumps on DraftKings’ road to expanded market share and profitability, boosting hold while not shedding share is possible because it’s something rival FanDuel, the largest online sportsbook operator in the US, is proving adept at.