DraftKings Sailing Rising Tide, Has Multiple Advantages, Says Needham Analyst

Posted on: November 16, 2020, 09:37h. 

Last updated on: November 16, 2020, 11:51h.

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

Despite recent struggles, DraftKings (NASDAQ:DKNG) stock remains a Wall Street favorite. That sentiment is on display Monday, as Needham analyst Brad Erickson voiced enthusiasm for the name.

DraftKings stock
DraftKings founders (from left) Paul Liberman, Jason Robins, and Matthew Kalish seen in Boston in 2015. Analysts remain enthusiastic about the stock. (Image: Boston Globe)

In a note to clients, Erickson reiterates a “buy” rating and a $70 price target on the sportsbook operator. That forecast is one of the highest in the analyst community and implies upside of almost 67 percent from the shares trading at this writing.

We think new states opening up online sports betting and iGaming represent a rising tide for the industry, and that DKNG has clear first-mover, brand and capital advantages,” said the analyst.

On Election Day earlier this month, voters in Louisiana, Maryland, and South Dakota signed off on sports wagering. Louisiana and Maryland are relevant for DraftKings because of favorable population demographics, rabid fan bases, and the presence of professional sports franchises, as well as high-level NCAA programs.

Maryland could have sports betting operational by summer 2021, while Lousiana could be “live and legal” in 2022.

Building on Decent Earnings Report

Erickson’s bullish update on DraftKings stock comes after the operator delivered better-than-expected third-quarter results last Friday.

The Boston-based company said it lost 57 cents a share on revenue of $133 million in the July through September period, while Wall Street expected a loss of 61 cents on sales of $131.7 million. Monthly paying users surged 64 percent year-over-year, topping one million for the first time.

DraftKings gave investors other reasons to cheer, issuing 2020 sales guidance of $540 million to $560 million and a 2021 forecast of $750 million to $850 million. Analysts were expecting $526.8 million and $775.9 million, respectively.

Of course, how much the company is spending to gain new customers and the timeline to profitability — likely 2022 or 2023 — remain sticking points for some investors.

“Customer acquisition costs and online sports betting profitability will remain persistent debate points – we are confident that the company is acquiring customers with a stringent view of return on investment and long-term value while maintaining, if not increasing, its share in the early markets,” said Erickson.

Big in some Big States

DraftKings is the second-largest online sportsbook operator in the US, with almost 30 percent market share, trailing rival FanDuel by about 345 basis points. In states where multiple companies engaged in the business, DraftKings holds the top spot in Indiana and West Virginia, according to Roundhill Investments.

The firm also has enviable positioning in New Jersey and, as Needham’s Erickson notes, DraftKings is increasing market share in Pennsylvania even as new competitors enter that fast-growing market.

Acquiring gamblers is one thing, but keeping them is another. However, the analyst sees DraftKings displaying proficiency when it comes to retention.

“Retention remains an open question. But we take DKNG’s performance to-date in states like New Jersey (with 14 other competitors) as the best indicator for success,” he wrote.