DraftKings Lands Morgan Stanley Coverage, Bank Sees ‘Best-in-Breed’ Sports Betting Opportunity

Posted on: April 30, 2020, 09:23h. 

Last updated on: April 30, 2020, 10:58h.

Newly public DraftKings (NASDAQ:DKNG) is trading modestly higher Thursday after Morgan Stanley initiated coverage of the daily fantasy sports (DFS) behemoth and sportsbook operator with an “outperform” rating and a $23 price target.

DraftKings Morgan Stanley Coverage
Morgan Stanley sees big upside for Jason Robins’ DraftKings. (Image: ESPN)

That price target from analyst Thomas Allen implies upside of just over 23 percent from DraftKings’ Wednesday close of $19.48. The DFS company went public last Friday and is up slightly more than 10 percent from the final closing price for Diamond Eagle Acquisition Corp., the special purpose acquisition company (SPAC) used as the vehicle to take DraftKings public.

DraftKings is an almost pure play on the early stage legal US sports betting and iGaming growth opportunity, with a customer acquisition advantage,” said Allen in a note to clients.

The Morgan Stanley analyst, who’s long been bullish on the outlook for the domestic online gaming and sports betting markets, called DraftKings a “best-in-breed” sports wagering name. He notes that in a high upside scenario, the stock could be worth as much as $75, or almost quadruple where it resides at this writing.

Bold Call

Late last year, Morgan Stanley boosted its outlook for the US sports betting market, calling for $7 billion in revenue by 2025, assuming 36 states come online. In the DraftKings note, Allen alters that forecast, saying the industry should grow by a factor of eight to $12 billion by 2025, and that the newly public company will outpace that growth, increasing revenue by 30 percent over that period.

“We think DraftKings will reach 20% market share of US sports betting and 15% of online gambling,” said Allen.

With Colorado joining the fray tomorrow, 18 states will have live, legal sports betting. Another five signed off on it, but haven’t come online yet.

Morgan Stanley’s $23 price forecast on DrafKings implies a forward price-to-earnings ratio of 16x, making it more expensive than a broader basket of its peer group. The stock is, however, slightly less expensive than the S&P MidCap 400 Index. With a market value of around $6 billion, DraftKings is currently a mid-cap name.

Premium Justified

While DraftKings is pricier than its peer group, Allen believes the premium is justified, and that the company has a visible path to profitability.

“In our view, DraftKings deserves a premium as an almost pure play on US sports betting and iGaming, in contrast to peers that either have brick-and-mortar or international regulatory risk,” said the Morgan Stanley analyst.

Last year, the company’s revenue surged 43 percent, but its losses grew, prompting some concern in the investment community about when the bleeding will stop.

Allen thinks the sportsbook operator can turn a profit as soon as 2023 before posting earnings of $640 million in 2025 and $1 billion in 2028. The analyst also points out that DraftKings has $500 million in cash on hand, a large sum relative to some of its capital-starved competitors.