DraftKings Could Be 2023 Small Stock Winner

Posted on: December 29, 2022, 01:54h. 

Last updated on: December 29, 2022, 03:05h.

Entering Thursday, DraftKings (NASDAQ: DKNG) stock was saddled with a 2022 loss of 59.77%, which dragged its market capitalization down to $4.99 billion.

An image from a DraftKings office. Jefferies thinks the stock can rebound in 2023. (Image: Bloomberg)

That’s at the lower end of mid-cap territory and a far cry from its previous market value high of around $35 billion — firmly in the large-cap space. Still, some strategists believe the beaten-up gaming name can rebound in 2023.

In a recent report, Jefferies equity strategists Steven DeSanctis highlights a scenario in which lower market cap stocks, such as DraftKings, could bounce back as soon as next month.

We see a good possibility based on when the first 11-months have been this bad, December is weaker than norm, but January is much better,” he wrote. “When a majority of stocks are in the red for the year, the next January’s return is also above average with lower market cap performing best.”

DraftKings is one of 20 lower-market cap names highlighted by Jefferies as offering 2023 rebound potential. Though it’s one of several consumer discretionary stocks on the list, it’s the only gaming name in the group.

Lower Losses Essential to DraftKings’ 2023 Outlook

In November, DraftKings forecast a 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $475 million to $575 million next year, well ahead of the consensus estimate of $426 million on revenue of $2.8 billion to $3.0 billion.

The online sportsbook operator added it could be EBITDA positive by the fourth quarter of 2023. With that forecast now effectively priced into the stock, DraftKings needs to ensure it, at the very least, meets that timeline to profitability and materially lowers expenditures. That’s because investors are losing patience with the operator’s profligate spending and money-losing ways.

Beyond industry trends, such as increased legalization of sports betting and iGaming, some macroeconomic factors could support a DraftKings resurgence in 2023.

“The macro backdrop continues to improve with high-yield spreads close to 5% and below their long-term average. The dollar has weakened considerably from its peak, while volatility has ticked lower,” DeSanctis noted.

How patient investors are willing to be is a different story, particularly as rivals Barstool Sportsbook, BetMGM, and Caesars Sportsbook are nearing profitability. FanDuel, the largest online sportsbook operator, could be profitable on an annual basis for the first time in 2023.

Another Gaming-Related Stock Could Shine in 2023

DraftKings isn’t the only betting-related stock analysts are bullish on heading into the new year. Endeavor Group Holdings, Inc. (NYSE: EDR), the parent company of the Ultimate Fighting Championship (UFC), was tipped by UBS as a potential 2023 winner.

We see EDR as well-positioned to capitalize on secular trends in Media, notably sports rights inflation, while its revenue streams have generally low economic sensitivity,” according to the bank.

Endeavor purchased the OpenBet sports data business from Light & Wonder earlier this year. Clients of that unit include some of the largest sportsbook operators.