DraftKings Analyst Boosts Estimates, Sees Favorable Legislative Landscape Despite California Setback

Posted on: June 24, 2020, 11:43h. 

Last updated on: June 24, 2020, 12:12h.

In a note to clients today, Canaccord Genuity analyst Michael Graham lifted his second-quarter revenue estimate on DraftKings (NASDAQ:DKNG). He cited better-than-expected stability during the coronavirus economic shutdown and the company’s recent capital raise.

Canaccord Genuity Analyst Boosts DraftKings
Canaccord Genuity analyst Michael Graham raised his revenue estimates on DraftKings and is enthusiastic about the legislative outlook for sports betting. (Image: CNBC)

Last week, the daily fantasy sports (DFS) firm and sportsbook operator forecast turnover of $70 million to $75 million for the April through June period. It’s a number that surprised investors, because the US sports calendar is light as a result of COVID-19. Graham bumped his estimate to roughly the midpoint of that range at $72.8 million, up from $48 million.

The analyst breaks down his projection as follows: $30.2 million from DFS, $13.5 million attributable to online sports betting (OSB), $14.7 million from internet casinos, and $14.4 million from SBTech, the sports betting technology provider DraftKings merged with to create a publicly traded entity.

We continue to like DKNG stock, recognizing that a premium, forward-looking valuation is offset by a large opportunity and what we believe to be a conservative set of estimates,” said the Canaccord analyst in a note provided to Casino.org.

While noting “modest share dilution,” Graham also praised DraftKings for its recent capital raise in which the company sold 16 million shares and insiders dumped another 24 million. The analyst said that leaves the operator with a cash balance of roughly $1.1 billion.

Looking at the Legislative Ledger

On Monday, DraftKings plunged more than nine percent, its worst intraday showing as a public company, after a California state senator pulled a sports betting proposal. With that move, the earliest Golden State policymakers could reconsider the issue is 2022, meaning the first legal sports wager in the largest US state won’t be placed until 2023.

Citing a conversation with sports wagering attorney Daniel Wallach, Graham mentions legislative happenings in seven other states in addition to California. In New York, where DraftKings operates an upstate retail sportsbook, the analyst sees “decent prospects” for increased legalization next year. In neighboring Massachusetts, the analyst believes legislation is likely this year.

In the South, Georgia “should make significant progress soon” because it’s not encumbered by existing gaming stakeholders or constitutional issues, said the analyst. He assigns a 50 percent probability of Kentucky legalizing sports wagering in 2021.

Much of the bull thesis for DraftKings revolves around more states, primarily those with mid-sized to large populations, embracing sports wagering.

Pricey, But Worth It

Graham reiterated a “buy” rating and a $50 price target on DraftKings. That forecast is 18x the company’s expected 2022 revenue, which the analyst acknowledges is rich, but credible.

“We recognize this is a forward-looking, premium valuation,” he said. “However, we find it warranted, given the size of the opportunity, DKNG’s sound competitive position, limited options for investors looking for exposure to US online sports betting, and early signs that our estimates are likely to prove conservative.”

Graham’s price estimate on DraftKings implies upside of more than 35 percent from current levels.