DraftKings Viewed as Bargain Among Gaming Stocks

Posted on: November 11, 2024, 05:06h. 

Last updated on: November 12, 2024, 09:15h.

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

In DraftKings’ (NASDAQ: DKNG) four-plus years as a standalone publicly traded company, rare have been the occasions that the stock has been considered inexpensive. Those instances arguably don’t exist at all, but at least one analyst believes shares of the online sports betting giant currently look appealing on valuation.

DraftKings
Inside DraftKings’ Nevada office. An analyst says the stock is appealing on valuation relative to free cash flow capabilities. (Image: Nevada Independent)

In a new report to clients, Macquarie analyst Chad Beynon said DraftKings “represents one of the best bargains among high-growth companies.” That view was issued after the gaming company lowered its fourth-quarter guidance last week, sparking a brief pullback by the stock. However, the shares rebounded on Monday, helped in part by bullish calls from analysts, jumping 7.68% on volume that was more than double the daily average.

A big part of the tepid outlook for the current quarter boils down low NFL hold in October, meaning bettors had some success against the house, but Beynon sees DraftKings’ earnings volatility abating going forward.

Management expects much lower relative earnings before interest, taxes, depreciation, and amortization (EBITDA) swings from short-term hold as EBITDA becomes a larger percentage of revs (30% target), minimizing the magnitude of flow-through,” wrote the analyst. “Management still expects structural hold of 10.5% this year (10% actual hold), with structural hold increasing to 11% ’25.”

Beynon reiterated an “outperform” rating on DraftKings while lifting his price target on the stock to $51 from $50, implying upside of 18% from Monday’s close.

DraftKings’ Stout Free Cash Flow Story

Benyon cited DraftKings’ proficiency in generating free cash flow (FCF) as one of the factors supporting the stock’s attractively valued status relative to other high-growth fare.

That means, based on rising free cash flow expectations, the gaming stock is arguably somewhat discounted relative to those estimates. Additionally, its status as an FCF generator and raiser is notable because many growth companies aren’t profitable and aren’t yet accumulating free cash.

“Management also expects $850m of FCF in ’25, representing a FCF conversion rate of 89%. Based on current ’26E consensus, this would imply a FCF yield of ~7%, representing one of the best bargains among high-growth companies, in our view,” added Beynon.

Should DraftKings meet or beat that $850 million FCF forecast next year, it would likely be one of the best rates among all online gaming companies. The operator’s FCF expansion could support a return of capital to shareholders, including fortification of a previously announced $1 billion share buyback plan.

DraftKings Still Offers Growth

Based on traditional valuation metrics, DraftKings isn’t cheap in the strictest sense of the word. The shares trade at 75.55 x forward earnings and 19.56x book value, according to Finviz data.

In other words, it remains a growth stock and it has the potential to cement its status as one of the higher-growth names in the gaming space.

“DKNG is a leader in the fast-growing US Online Gaming industry. We believe the company, which has transitioned to profitability, is well positioned for double-digit revenue growth,” concluded Beynon.