Ahead of its fourth-quarter earnings report scheduled for Friday morning, DraftKings (NASDAQ:DKNG) stock is following the broader market lower today. But a one-day slide isn’t preventing some on Wall Street from waxing bullish on the sportsbook operator.
In a note to clients, Macquarie gaming analyst Chad Beynon reiterates an “outperform” rating on the stock, while increasing his price target to $68 from $64. That implies upside of about 13 percent from where the shares closed on Feb. 24.
As our top pick in online gaming, we continue to believe that DKNG has all the right tools (to keep) its position as clear top two player — strong brand, pristine balance sheet, proprietary tech, data science and retention tools, league/team sponsorships and media partnerships,” said Beynon.
The analyst forecasts long-term market share of approximately 20 percent for DraftKings, trailing only rival and FanDuel parent Flutter Entertainment Plc (OTC:PDYPY).
For the December quarter, analysts expect DraftKings will post a loss of 49 cents a share on revenue of $232.04 million. Over the past 90 days, four analysts lowered earnings forecasts, while seven increased sales estimates.
What Could Move DraftKings Stock
Wall Street is broadly positive on DraftKings, with 18 of the 27 analysts covering the name anointing it very bullish or bullish ratings, compared to just one “sell” call.
Still, with break-even earnings before interest, taxes, depreciation and amortization (EBITDA) not expected to arrive until next year, and profitability unlikely to be seen before 2023, DraftKings needs to hit on some other key metrics, namely adding market share.
Research firm Eilers & Krejcik Gaming estimates that two online casino markets – New Jersey and Pennsylvania – will account for 34 percent of the company’s fourth-quarter gross gaming revenue (GGR). The firm also forecasts that 17 percent of GGR will be attributable to New Jersey sports wagering, and that 12 percent will be derived from Illinois sports wagering. That means DraftKings is outperforming in that state relative to its positioning in Indiana and Pennsylvania — markets where it’s been live for longer time frames.
Speaking of regional coverage, DraftKings is operational in 14 states, representing almost a third of the US population. Beynon, the Macquarie analyst, says the industry should add another 15 percent of the population over the course of this year and 2022.
With no profits as of yet and trading at 50.90x sales and 11.84x book value, DraftKings is valued as a growth stock, which it is.
That also means it needs to deliver on or exceed growth expectations. It just might be able to do that. Beynon is forecasting a 34 percent compound annual growth rate for the company’s revenue over the next six years.
As revenue increases, market and general and administrative expenses as a percentage of sales will decline. Regarding profitability, patience is required. But the DraftKings time line compares favorably with internet giants Amazon and Twitter. Beynon notes it took those companies six and five years, respectively, after initial public offerings (IPOs) to cease losing money.
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