DraftKings Inc. (NASDAQ: DKNG) is one of the leading independent online sports betting sites in the United States. It faces fierce competition from larger companies and smaller companies alike. And while it operates in about half of the states it has not yet been approved to legally operate in states where gambling is still not legal. One thing that DraftKings has going for it is that it does not have to manage large gambling properties and casinos among other physical locations. DraftKings is also one of the players in fantasy sports leagues.
There is a growing “strategic investing” case here and that is that DraftKings is on the verge of entering profitability. This is a very pivotal time for a growth company to see its stock go from times-EBITDA to times-earnings for traditional investors. It can also be very painful. That said, DraftKings has already overcome much of that pain after its fall from the pandemic highs.
DraftKings is represented as the third largest U.S. sports book with a $17.7 billion market cap. Flutter Entertainment plc (NASDAQ: FLUT) is ahead of it with a $38.5 billion market cap, but DraftKings’ revenue is growing faster and by some counts has more consistent results with double-digit revenue growth in recent years. Perhaps the biggest development of all since its SPAC/IPO that shareholders can ask for is for DraftKings to finally become a profitable company.
When companies become profitable they have to spend less time talking about EBITDA, gross margin trends and their enterprise value (which includes debt). They can begin the transition of speaking more plainly to investors — “We took in ___ in revenues and made ___ in earnings!” It is a simple concept but there is a huge adjustment that takes place ahead of companies migrating from mega-growth to suddenly being evaluated with traditional P/E ratios. It can be painful, but as noted above DraftKings’ shareholders already experienced much of the post-pandemic pain in 2022.
FROM 2020 TO PRESENT DAY
DraftKings came public via a Special Purpose Acquisition Company (SPAC) transaction. Its shares quickly escalated to $60 in 2020 and again in 2021. Since its slide from late 2021 into early 2023, its stock has not yet been able to recapture its former highs despite a very brief challenge nearing $50 early in 2024. The stock is now close to $36.50 and multiple Wall Street brokerage firms are looking for DraftKings’ new efforts to yield big rewards for its shareholders.
Wall Street analysts are still looking for a Q3-2024 loss, but that is expected to be positive earnings with a $0.29 in earnings per share (EPS) for Q4-2024. The consensus analyst targets for annual earnings are expected to be -0.27 EPS for fiscal 2024 and then a profit of $0.71 EPS for fiscal year 2025. Other estimates will vary, as Zacks Consensus Estimates show an expected annual -$0.31 EPS this year and a swing to profitability at $0.31 EPS for 2025.
There are many issues driving the potential gains here. Online gambling has risen exponentially in recent years. many states are still not even really online (even if their customers may still be!). States can be counted to almost assuredly pass online gambling in the years ahead for the simple reason that sports betting and gambling is a solid source of new and untapped revenue sources.
DraftKings is also set to be able to mirror some of FanDuel’s live and in-game betting that has allowed it to have the lead over DraftKings. DraftKings recently acquired Simplebet to offer micro-bets to its customers. DraftKings’ revenue of $3.67 billion in 2023 is expected to reach $5.1 billion in 2024 and then reach $6.2 billion in 2025.
WHAT ANALYSTS ARE SAYING
Exane BNP Paribas remains somewhat muted compared to other firms. On September 10, it upgraded DraftKings to Neutral from Underperform (a sell-equivalent rating) with a $35 price target. A report from Needham & Co. on September 9 also reiterated its Buy rating and a $60 price target.
A recent report from Benchmark (August 20) called DraftKings a Top Idea, with a Buy rating and a $44 price target. The analyst call pointed out that the NFL season is about to get underway (it has since) and that shares were down 32% from the $50 stock price just in March. This call was also after DraftKings boosted its own revenue target for 2024. The report called out the gains ahead coming from valuation contraction, tax mitigation strategies, higher margins and new user growth.
In August, after earnings, BofA Securities reiterated its Buy rating and a $50 price objective despite the EBITDA guidance being lower. With $900 million to $1 billion in projected EBITDA next year, BofA sees a newly outlined gaming tax surcharge that will roll out early in 2025 for high-tax states. The report signals a profit potential here. It said:
The surcharge is only on net winnings, and is not included in 2025 guidance but could prove highly profitable, though we think ultimate effectiveness could depend significantly on the competitive landscape and broader adoption.
After a loss at -$1.65 EPS in 2023 and a -$0.36 EPS expectation for 2024, BofA is forecasting $0.48 EPS in 2025 and $1.13 EPS in 2026. BofA is also looking at DraftKings’ cash and cash equivalents to grow from a constant $1.2 billion to $1.3 billion in 2024 and prior years up to more than $3.5 billion in 2026.
Other analysts have also made slight tweaks to their reports:
- 9/11 Morgan Stanley (Overweight) reiterated its $47 price target
- 9/04 UBS (Buy) raised its target to $58 from $56
- 9/04 Susquehanna (Positive) raised its target to $48 from $47
- 8/26 Macquarie (Outperform) reiterated its $50 price target
- 8/20 Benchmark (Buy) raised its target to $44 from $41
- 8/13 Morgan Stanley (Overweight) cut its price target to $47 from $51
- 8/05 Barclays (Overweight) cut its target to $43 from $53
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A BRIEF REMINDER ABOUT ANALYSTS
Oggonomics will always take the opportunity to remind its readers and investors that no single analyst report should ever be the sole basis of deciding whether to buy, sell or hold a stock. That ultimate decision is the responsibility of each investor and should be made with their financial advisor.
The research and price targets issued herein are from outside brokerage firms and are not the price targets nor formal ratings issued by Oggonomics. As always, there are no assurances that any of the analysts featured in this report will be accurate in their forecasts.
With shares at $36.50, DraftKings has a 52-week range of $25.73 to $49.57.
