DraftKings Finds Another Bull, as Jefferies Starts Coverage With Street-High Target of $55
Posted on: June 22, 2020, 09:01h.
Last updated on: June 22, 2020, 02:49h.
DraftKings (NASDAQ:DKNG) continues winning support from sell-side analysts, as Jefferies’ David Katz today initiates coverage of the sportsbook operator with a “buy” rating and price forecast of $55, the highest on Wall Street.
Katz notes that the US online sports betting market – one of DraftKings’ core businesses – is in the early innings of what could be a decade-long ramp-up. He sees US sports wagering morphing into a $19 billion industry between 2023 and 2025, assuming 44 states legalize the endeavor between now and 2023. That would be nearly double the current number of 23 states, only 18 of which are operational.
With patience, we expect a pivot toward profits, cash flow,” said Katz in a note to clients.
“The arc toward success for DKNG is longer than other names in our coverage and investors are buying a gradually evolving story,” Katz continued. “Therefore, measurements of success in the near-term should be focused on top-line metrics and capital deployment, with the gating factor being regulatory approvals.”
Following a recent secondary offering and sales by insiders and early investors, DraftKings has 351.9 million shares outstanding. Multiply that by the $55 price estimate and the market value of the newly public company vaults to $19.3 billion, up from $12.76 billion at this writing.
Same Old Song, but It’s Music to Investors’ Ears
Since the DraftKings initial public offering (IPO) on April 24, bullish analysts typically cite the same batch of favorable fundamental tailwinds for the company, including expansion of online casinos and sports betting, which would grant the company access to states where it currently does not operate.
Katz doesn’t back away from that thesis, hailing DraftKings’ momentum in daily fantasy sports (DFS) and wagering in New Jersey and states where those activities are permitted as factors positioning the company to gain market share as other states come on board.
As for iGaming, data suggest that’s a booming business. In Pennsylvania, a market in which DraftKings operates, online slot machine handle topped $1 billion for the first time in May, while table games saw $778.5 million in action, up $150 million from April, according to the Pennsylvania Gaming Control Board (PGCB).
Katz is also enthusiastic about DraftKings’ exposure to the burgeoning in-game betting market, something CEO Jason Robins recently highlighted. The analyst said his proprietary model indicates soaring in interest in live wagering, and that the activity drives social engagement among bettors. He notes that in-game betting “drives higher revenues” and “double hold” percentages. Hold percentage is the amount an operator retains from gameplay.
Path to Profitability
Katz also points out that attitudes toward sports wagering and iGaming are becoming more positive, meaning politicians face easier sells in terms of passing related legislation as avenues for generating more revenue.
The analyst adds DraftKings should be cash flow positive and profitable on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) by 2023.
His $55 price target implies upside of 32.5 percent from where the stock trades at this writing.