DraftKings Earns Upgrade as Analyst Sees Attractive Earnings Potential

Posted on: March 7, 2023, 01:07h. 

Last updated on: March 7, 2023, 04:09h.

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

On what’s shaping up to be a rough day for equities, DraftKings (NASDAQ: DKNG) stock is standing out in a positive fashion after an analyst upgraded shares of the sportsbook operator.

DraftKings stock
DraftKings signage at a baseball stadium, above. The stock got a lift Tuesday from an analyst upgrade. (Image: Forbes)

In a note to clients on Tuesday, Argus analyst John Staszak lifted his rating on the gaming stock to “buy” from “hold” with a new price target of $22. That implies upside of 14.6% from the March 6 close.

Given DraftKings’ falling customer acquisition costs and ability to grow at 20% or higher over the next several years, we are confident in its long-term growth prospects,” wrote Staszak.

His $22 price forecast on the gaming stock is below the Wall Street average of $23.80 and at the lower end of the $13 to $38 range held by analysts covering the stock. Of those analysts, 16 rate DrafKings “buy” or “strong buy,” while a dozen have the equivalent of a “hold” rating on the shares, and three rate it “sell.”

Argus Sees Revenue Growth with DraftKings

Last month, 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.

Staszak thinks the company can do even better. The analyst forecasts $3.1 billion in 2023 sales, up from $323 million in 2019. The analyst also cites improved customer retention, market share gains, and increased profitability in jurisdictions where the operator was established entering this year as potential catalysts for the stock.

The aforementioned 2023 guidance offered up by DraftKings includes markets in which the company is currently operating and those in which it expects to go live at some point this year, such as Massachusetts and Puerto Rico.

The company’s product portfolio, including iGaming, improved technology, and same-game parlays (SGPs), is also seen as a tailwind.

“As additional states legalize online sports betting and consumers allocate more of their income to wagers, we expect DKNG’s revenue to increase to $3.1 billion in 2023,” added the Argus analyst.

DraftKings’ Surprisingly Compelling Valuation

As an emerging growth company, DraftKings is rarely described as attractively valued. Some analysts make the case the stock is expensive. Staszak sees things differently.

The analyst notes DraftKings trades at a price/sales multiple of 3.6X compared with 7x for a basket of high-growth tech stocks, including previously beloved names such as Peloton Interactive, Shopify, Teladoc, and Zoom Video.

Staszak believes the valuation gap is too wide, citing DraftKings’ declining customer acquisition costs and alluring growth outlook. The gaming company forecast the arrival of profitability in 2024, though some analysts believe it could happen later this year.