DraftKings Stock Draws JPMorgan Upgrade

Posted on: September 26, 2023, 03:28h. 

Last updated on: September 27, 2023, 01:32h.

Following a slump that dates back to July, DraftKings (NASDAQ: DKNG) stock rallied on Tuesday with the help of bullish commentary from JPMorgan.

Employees at DraftKings headquarters, seen above. An analyst says the stock can rebound and offers significant upside potential. (Image: CNBC)

In a note to clients today, analyst Joseph Greff upgraded the online sportsbook operator to “overweight” from “neutral” while boosting his price target on the recently downtrodden shares to $37 from $26. That new forecast implies an upside of 35% from the September 25 close and arrived as DraftKings is off 19.31% from its 52-week high, printed on August 4.

We are taking advantage of sluggish share price performance since late July,” wrote Greff. (Sports betting) is an appealing sector, with attractive same-store and new market growth prospects, against the backdrop of an industry-wide improving operating expense control environment.”

Greff’s $37 price target on DraftKings, which is slightly above consensus, is based on 15x the operator’s expected 2026 earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.2 billion and estimated year-end cash of $3 billion in 2026. Current short interest in the stock is 5.4%, high enough that a fresh rally in the shares could compel bearish traders to cover those losing bets.

Catalysts Abound for DraftKings Stock

Even with the recent pullback, DraftKings stock has been a 2023 star in the gaming industry, surging 144.29% since the start of the year.

Catalysts are in place for the shares to rebound and, potentially, reach Greff’s price target. Those sparks include a normalizing cost environment, DraftKings’ own emphasis on better managing expenditures, and a decreasing dependence on new markets to drive top-line growth.

“DKNG stands to benefit from a continued increase in market share from higher hold rates (driven by parlay mix and better risk/ trading) and improved loyalty (from brand recognition, trust, and product enhancements),” added the JPMorgan analyst. “Customer acquisition costs can continue declining as national scale is achieved and sales/marketing costs fall precipitously. These translate to better flow-through and rapid EBITDA margin expansion.”

Though not mentioned by Greff, DraftKings has other revenue-generating avenues that likely aren’t fully appreciated by the investment community yet. Those include DraftKings Marketplace and Reignmakers, a fantasy sports game rooted in nonfungible tokens (NFTs).

DraftKings Establishing a Moat

“Wide moat” is a phrase frequently bandied about in Corporate America to describe a company’s competitive advantages. Put simply, it highlights a firm’s ability to keep competitors from stealing market share and/or its ability to retain customers by making switching to a rival unappealing.

While barriers to entry in the sports wagering industry are relatively low and there are dozens of competitors in the US, the domestic sports betting space is essentially a duopoly controlled by FanDuel and DraftKings.

As noted by Greff, DraftKings has built an enviable moat that’s allowed it to ward off a viable competitor in Caesars Sportsbook. That status is all the more important at a time when Fanatics and Penn Entertainment (NASDAQ: PENN) with ESPN Bet are looking to challenge the FanDuel/DraftKings duopoly.