Wall Street remains divided on DraftKings (NASDAQ: DKNG). But the stock drew support today from a pair of analysts.
Inside a DraftKings office. The stock earned praise from two analysts today. (Image: Bloomberg)
Recently, some analysts turned bullish on the beleaguered gaming stock, citing factors such as encouraging hold data to start the 2022 NFL season, valuation, rising same-state revenue, and a more restrained promotional spending environment.
In a note to clients today, CFRA Research analyst Zachary Warring upgraded DraftKings to “buy” with a $20 price target, implying upside of about 53% from the Oct. 21 close. He estimates the company can eventually command 35% of what could be an $80 billion market for iGaming and sports wagering in North America.
We expect tailwinds to continue as more states pass legislation to legalize sports betting and mobile gaming. As DKNG enters more states they will continue to grow revenues +25% annually while improving margins and leveraging fixed costs,” according to the analyst.
That $80 billion estimate is one of the more ambitious. But DraftKings garnering 35% of total addressable markets isn’t unreasonable, given its already solid perches in online sports betting and internet casinos.
Valuation Case for DraftKings Stock
Bullish musings aside, there’s no denying that DraftKings stock entered Monday with a year-to-date loss of 51.91% — enough to scare even risk-tolerant investors away.
The primary reason for that slide is market participants’ distaste for money-losing companies against the backdrop of rising interest rates. Rising rates diminish the appeal of growth firms’ future cash flows, and DraftKings most certainly is a growth stock.
Still, there’s a valuation case with the downtrodden shares. CFRA’s Warring said that case is intact, with the stock trading below 4x 2022 revenue forecasts. His $20 price forecast implies a 2022 EV/sales multiple of 3.8x.
After a dismal 2021 and mostly forgettable run in 2022, publicly traded sportsbook operators such as DraftKings — and casino companies with direct exposure to the business — are under scrutiny from analysts and investors regarding promotional spending. There’s some evidence operators are keeping a lid on that spending this football season.
Some analysts see signs of promotion rationalization from DraftKings. That’s as the gaming company is under pressure to stem losses and show investors that there’s a viable path to profitability sooner than later.
Speaking of Football Impact…
In the firm’s weekly update on the NFL’s impact on sportsbook operators, Needham analyst Bernie McTernan noted week seven results appear promising for gaming companies. He rates DraftKings stock a “buy” with a $25 price target.
He also highlighted DraftKings as having one of the highest-rated mobile apps next to rival FanDuel and a viable customer acquisition plan.
“We believe DKNG has a sustainable customer acquisition strategy that should continue to drive its first- or second-place position in all states. We expect margins to scale with the tech stack transition to SBTech from Kambi, benefits of national vs local marketing and reaching terminal market access penetration,” wrote McTernan.