DraftKings Poised for 2023 Beats, But Caution Warranted
DraftKings (NASDAQ:DKNG) stock is tracking other gaming equities in the early stages of 2023. But some on the sell side, while acknowledging a catalyst-rich story, are neutral on the online sportsbook operator.
In a note to clients late Monday, Stifel analyst Jeffrey Stantial initiated coverage of DraftKings with a “hold” rating and a $15 price target, implying only modest upside from today’s close at $14.56. He notes that while the gaming company has the potential to beat and raise its previously issued 2023 guidance, profitability remains a few quarters out.
However, profitability remains several quarters away, and we see risk of market share compression as DraftKings rationalizes customer acquisition spend and as several well-capitalized competitors make their US debut,” wrote Stantial.
The analyst doesn’t cite rivals by name, but Fanatics is lurking, recently entering the US sports betting arena and stoking speculation of promotional spending war in the process.
For DraftKings Stocks, Profitability Is of the Essence
With Fanatics likely profitable for the bulk of, if not all of 2022, and other rivals getting close to that benchmark, DraftKings needs to show analysts and investors it can halt its money-losing and generate positive earnings before interest, taxes, depreciation and amortization (EBITDA).
The prevailing wisdom on Wall Street is that the operator will be able to do that in the fourth quarter of this year. But some analysts believe its profitability could arrive as soon as the April quarter. Aside from that obvious issue, Stantial sees catalysts for DraftKings stock.
“We see several positives for the shares, including: (1) a likely leading long-term market share position given scale, technology, first mover advantage, and cross-sell opportunities, (2) material growth tailwinds for the broader US online gambling market, (3) muted expectations entering 2023, and (4) reflexive benefits from DraftKings’ ‘win at all costs’ mentality,” noted the analyst.
DraftKings is higher by 27.83%. But that rally could be threatened by a larger-than-expected interest rate increase by the Federal Reserve and/or a recession that pinches consumer discretionary spending.
Headwinds, Tailwinds for DraftKings Stock
Stantial points out the possibility exists for multiple headwinds or tailwinds for DraftKings shares this year.
“Upside risks include: (1) faster than expected profitability, (2) new state expansion, (3) further supply exits, and (4) federal excise tax repeal. Downside risks include: (1) rising interest rates, (2) difficulty reaching profitability or margin targets, (3) new competitive supply, and (4) regulatory changes,” according to the Stifel analyst.
On the US regulatory front, industry consensus holds that only North Carolina and Vermont are likely to approve mobile sports wagering this year, leaving Texas as the only possible large-scale surprise for sportsbook operators. But that’s a stretch. On the upside, Stantial says DraftKings trades at the low end of the historical valuation range for top-tier European sportsbook operators.
Despite Stantial's optimism about DraftKings' potential market share and growth tailwinds, he highlights the need for the company to demonstrate profitability. He mentions that other rivals, such as Fanatics, are approaching profitability, putting pressure on DraftKings to show similar results. In the context of US regulatory changes, only North Carolina and Vermont are expected to approve mobile sports wagering this year, leaving Texas as a potential surprise for sportsbook operators. However, Stantial considers this a stretch, and he notes that DraftKings currently trades at a lower valuation than top-tier European sportsbook operators, indicating potential upside.
In the casino news, there's a developing trend of well-capitalized competitors entering the US sports betting market and potentially engaging in promotional spending wars to gain market share. This evolution in the industry poses a risk of compressing DraftKings' market share and impacts its profitability goals.
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