DraftKings Product Investment Could Be Catalyst, Says Analyst

• Operator’s product leadership could drive upside for shares
• Live betting an area of focus for DraftKings

Shares of DraftKings (NASDAQ: DKNG) are off 9.52% year to date, a performance that arguably belies the operator’s strong technology stack and its high perch in product development.

The sportsbook giant’s product investment, including a focus on in-game wagering, was highlighted in new commentary by Jefferies analyst David Katz as part of the firm’s updated Franchise Picks list. That’s a group of 28 catalyst-rich stocks trading at valuations suggesting possible upside. DraftKings is the only gaming name currently on the list. Katz rates the stock a “buy” with a $60 price target.

We think investments to enhance DKNG products, including the recent focus on in-play betting, could be a key product differentiator and growth driver,” notes Katz. “Further, we expect that the evolution of existing markets, additional states legalizing over time and the Jackpocket acquisition represent incremental positives.”

DraftKings announced its $750 million acquisition of Jackpocket, an internet lottery courier, last year. Fifty-five percent of that purchase price was paid in cash with the remainder funded by the buyer’s stock. Given that lottery players are often recession-resilient,  the Jackpocket deal could be additive to DraftKings’ earnings over the long term, particularly as more states approve online lottery sales.

DraftKings Investors May Be Suffering from Paralysis by Analysis

As the US sports wagering industry and the landscape of related equities has increased in size over the past several years, some investors have attempted to glean stock-level insight from the monthly data reports delivered by the states in which online sports betting is permitted.

Katz acknowledged state-level gaming tax increases are a near-term concern, though the risks are “overblown” and with another tax hike in Illinois now baked into the equation, gaming levy increases by other states are likely to be slight.

“That said, digital operators have historically been able to mitigate tax increases by tightening promotional strategies and revisiting market access channels,” adds Katz. “Our view remains that the company’s product evolution should position it to confirm its leadership role in the US well into market maturity.”

DraftKings Has Catalysts

One of the themes that has recently weighed on DraftKings and other sports betting stocks is that bettors aren’t as bad as previously thought. That was seen in the fourth quarter when DraftKings and rivals mentioned earnings hits due to customer-friendly NFL outcomes — a trend that extended into the first quarter on the Super Bowl and the upset-light NCAA Men’s Tournament.

“We expect to see 90% free cash flow conversion next year,” concludes the analyst. “In our view, mean reversion on sports outcomes should return to the history of beats/raises, coupled with the clear path to cash generation, creating greater stability and downside protection for DKNG. In addition, the advent of in-play betting volumes in the US is underrepresented in estimates, which is bullish for the shares.”