DraftKings Soars as Analysts Gush Over 2023 Outlook

Posted on: February 17, 2023, 04:53h. 

Last updated on: February 17, 2023, 04:53h.

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

On the back of a better-than-expected 2023 outlook, analysts fawned over DraftKings (NASDAQ: DKNG) stock today, contributing to a 15.33% jump on volume that was more than six times the daily average.

DraftKings
Employees at DraftKings headquarters. The stock soared today as analysts displayed enthusiasm for the company’s 2023 guidance. (Image: CNBC)

That was good for one of the best intraday performances by the gaming equity since the online sportsbook operator became a standalone publicly traded entity in early 2020. The enthusiasm was the result of DraftKings guiding for 2024 profitability and telling investors late Thursday that the mid-points of its 2023 revenue and projected earnings before interest, taxes, depreciation, and amortization (EBITDA) loss were boosted to $2.95 billion and $400 million, respectively, from $2.9 billion and $525 million.

Despite expectations that the gaming could turn profitable later this year and the fact some rivals will do so, DraftKings’ update drew rave reviews among analysts.

Collectively, in an OSB landscape that’s increasingly diverging between the top 3 players and others, we expect DraftKings to consolidate a leading position in OSB, and the added flexibility to invest elsewhere should allow it to be more competitive going forward as new opportunities like iGaming materialize,” wrote BTIG analyst Clark Lampen in a note to clients today.

He upgraded the stock to “buy” from “hold” with a $24 price target. That implies upside of 16.8% from today’s close.

Profitability Proves Pertinent for DraftKings

DraftKings’ increased top-line guidance undoubtedly helps, but the Friday enthusiasm for the stock among analysts is likely more the result of the profitability outlook and lower 2023 loss.

Last year, DraftKings stock was dogged by persistent concerns in the investment community regarding what was viewed as an increasingly  lengthy timeline to profitability. That pressure was amplified as competitors notched modest profits in the fourth quarter and guided for more of the same this year.

“DKNG raised its revenue guidance slightly but what investors were really paying attention to was the improved adjusted EBITDA guidance to ($400M) at the midpoint for 2023 and expected positive adjusted EBITDA in 2024. DKNG launched in Maryland and Ohio in Q4 and Q1, bringing its Sportsbook live in 20 states and Ontario (40% of Canada’s population). We see plenty of long-term value in shares,” noted CFRA analyst Zachary Warring.

He rates DraftKings “buy” with a $25 price target. While some analysts believe DraftKings could have performed better in the fourth quarter and that the update 2023 forecasts are decent but not spectacular, prevailing sentiment is that the operator’s update is better than the stock’s bulls could have hoped for. With Friday’s surge, the shares are up 80.33% year-to-date.

DraftKings Prioritizing Costs

An efficient way for any company to increase profits is to scrutinize costs and DraftKings is doing just that. The operator could save up to $100 million this year via staff reductions and lower marketing and promotional spending.

Other efficiencies, including scaled back hiring and better product offerings, could be among the longer-ranging catalysts for DraftKings shares this year.

“Management included a bridge between guidance and actuals in this quarter’s presentation, with key upside drivers including 1) structural improvements in hold rate largely driven by parlays (+$30M of related upside), 2) improved promotional efficiency (+$25M), and 3) favorable sport outcomes (+$10M),” according to Stifel analyst Jeffrey Stantial.

He said the firm’s $17 forecast on DraftKings is under review.