Is DraftKings (DKNG) a Better Buy After Its Recent Correction?

Market Potential and Growth Prospects

Expanding Market for Online Sports Betting and iGaming

The addressable market for online sports betting and iGaming is expected to grow significantly, reaching $30 billion by 2028. This growth is driven by the increasing legalization of sports betting across various states in the U.S. and the rising popularity of online gaming platforms. DraftKings is well-positioned to capitalize on this expanding market, with operations in 25 states and Washington D.C., covering approximately 49% of the U.S. population. The potential legalization of sports betting in major states like Texas could further boost DraftKings’ market reach and revenue.

Revenue and Customer Growth

DraftKings has demonstrated strong revenue growth, reporting a 26% year-over-year increase to $1.104 billion in the most recent quarter. The company also saw an 80% increase in new online sports betting and iGaming customers year-over-year. This robust customer acquisition strategy is crucial for sustaining long-term growth, especially as the company expands into new markets.

Financial Performance and Profitability

EBITDA and Cash Flow Projections

DraftKings anticipates significant EBITDA margin expansion, projecting adjusted EBITDA of $380 million for 2024 and $950 million for 2025. This expected cash flow growth positions the company for aggressive expansion beyond the U.S., making it an attractive investment option in the current market environment. The company’s ability to achieve these projections will be a key determinant of its financial health and investor confidence.

Path to Profitability

Analysts predict that DraftKings will reach breakeven soon, with the company expected to post its final loss in 2024 before turning a profit of $366 million in 2025. This optimistic outlook is based on an anticipated average growth rate of 61% year-on-year. However, this aggressive growth expectation carries risks, particularly if the company fails to meet these targets. Additionally, DraftKings has a relatively high level of debt, with a debt-to-equity ratio of 97%, which could increase investment risks for shareholders.

Competitive Landscape

Market Share and Competitive Pressures

DraftKings holds a significant market share in the U.S. sports betting market, with a 34.8% share in 2024, closely trailing market leader FanDuel, which holds 37.8%. Despite facing stiff competition from other players like BetMGM and ESPN Bet, DraftKings has demonstrated a sustainable customer acquisition strategy. The company’s promotional spending for new customers has increased, making the promo environment “more aggressive than last year.” This strategy aims to attract and retain customers, although it may impact short-term profitability.

Strategic Responses to Competitive Pressures

DraftKings recently retracted its planned operational surcharges due to competitive pressures, particularly after FanDuel opted not to adopt similar surcharges. This decision aims to alleviate concerns regarding potential market share risks and company reputation. While the cancellation of surcharges may reduce operational uncertainty, questions remain about how DraftKings will offset the financial impact of this decision. The company’s strategic responses to these competitive pressures will be crucial in maintaining its market position and achieving long-term growth.

Analyst Sentiment and Price Targets

General Sentiment

Analysts have shown a generally bullish sentiment regarding DraftKings stock. The consensus rating is “Moderate Buy,” based on ratings from 27 Wall Street analysts, with 24 buy ratings, 2 hold ratings, and 1 sell rating. The consensus price target for DKNG is $49.52, representing a potential upside of 38.59% from the current price of $35.73. This optimistic outlook reflects confidence in DraftKings’ strong market position and growth prospects.

Recent Price Target Adjustments

Several analysts have recently adjusted their price targets for DraftKings, reflecting varying degrees of optimism:

• Susquehanna: Raised its price target to $48 from $47.
• Macquarie: Outperform rating with a target price of $50.
• Needham: Lowered rating to Buy with a new target price of $60.
• Benchmark: Maintained Buy rating with a target price of $44.
• UBS: Continues with a Buy rating and a target price of $58.

These adjustments indicate a generally positive outlook, although some analysts have expressed caution due to competitive pressures and high state taxes on sports betting.

Risks and Considerations

High Debt Levels

DraftKings has a relatively high level of debt, with a debt-to-equity ratio of 97%, well above the typical threshold of 40%. This elevated debt level could increase investment risks for shareholders, particularly if the company faces challenges in meeting its aggressive growth targets. Investors should carefully consider this risk when evaluating the stock’s potential.

Volatility and Market Sentiment

DraftKings stock has shown significant volatility, with a beta of 1.80, indicating higher sensitivity to market movements. The stock has experienced a 52-week range between $25.73 and $49.57, reflecting substantial price fluctuations. While analysts are generally optimistic, the stock’s volatility could pose risks for short-term investors.

Regulatory and Competitive Risks

The online sports betting and iGaming market is subject to stringent regulatory oversight, and changes in regulations could impact DraftKings’ operations and profitability. Additionally, the company faces intense competition from established players like FanDuel and emerging competitors like ESPN Bet. DraftKings’ ability to navigate these regulatory and competitive challenges will be crucial for its long-term success.

Conclusion

Based on the comprehensive analysis of DraftKings’ market potential, financial performance, competitive landscape, and analyst sentiment, it appears that DraftKings is a better buy after the recent market correction. The company’s strong revenue growth, expanding market reach, and optimistic analyst outlooks suggest significant upside potential. However, investors should be mindful of the risks associated with high debt levels, market volatility, and regulatory challenges.

In summary, DraftKings presents a compelling investment opportunity for long-term investors who are confident in the company’s strategic responses and growth potential. The stock’s current price offers a favorable entry point, with analysts projecting substantial upside in the coming years. As always, investors should conduct their own due diligence and consider their risk tolerance before making investment decisions.