DraftKings (NASDAQ:DKNG) is getting a lift Monday after Bank of America analyst Shaun Kelley said he expects the gaming company to top revenue estimates when it reports fourth-quarter and full-year results on Friday.
Last August, the online sportsbook operator forecast 2020 pro forma sales of $500 million to $540 million, implying year-over-year growth of 22 percent to 37 percent. For the December quarter, analysts expect the Boston-based company will report a loss of 49 cents a share on revenue of $231.47 million. In the prior quarter, DraftKings’ loss was 35 cents worse than forecast, but sales topped Wall Street projections by $1.34 million.
We see this upside coming from 1) better than expected state reported gross gaming revenue (GGR), 2) DKNG taking share in iGaming and 3) Illinois’ continuation of remote registration,” said Kelley in a note to clients.
While maintaining a “neutral,” rating, the analyst boosts his price target on DraftKings stock to $65 from $60, implying upside of 6.55 percent from where the name closed on Friday, Feb. 19.
Potential Surprises, Risks to DraftKings Stock
DraftKings reporting a quarterly loss won’t catch analysts and investors off-guard, assuming the loss is in line with or better than estimates. That’s because it’s widely expected the company won’t turn profitable on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) until 2022 or 2023.
Still, Bank of America’s Kelley notes if the Friday reports contains any surprises, it could be in the form of higher-than-expected promotional activity. Online sportsbook and internet casino operators such as DraftKings often spend heavily to lure new customers, and those expenditures can include hundreds of dollars in free bets.
However, investors may scrutinize high customer acquisition costs, particularly because rival Barstool Sportsbook, a unit of Penn National Gaming (NASDAQ:PENN), is achieving solid market share in Pennsylvania and Michigan with essentially no spending on marketing.
Another potential near-term risk to DraftKings, as Kelley notes, is the looming expiration of a lock-up period, meaning approximately 60 million shares could flood the market. That excess supply could present a near-term headwind to the stock.
What Else to Watch For
Last November, DraftKings revealed 2021 revenue guidance of $750 million to $850 million, implying year-over-year growth of 45 percent at the mid-point of that range. Undoubtedly, analysts and investors will be keen to hear if the company is making any material adjustments to that forecast.
At the state level, as Kelley points out, bullish comments on Illinois and online registration could be a post-earnings catalyst for the stock.
Likewise, analysts and investors will want updates on the operator’s trajectory in Michigan, Tennessee, and Virginia — three of its newest live and legal states. Mobile sports betting is less than a month old in Michigan, where DraftKings already has the second-largest market share.
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