DraftKings Enthusiasm Grows, Another Analyst Forecasts $65

Posted on: September 26, 2020, 03:31h. 

Last updated on: September 27, 2020, 10:19h.

DraftKings’ (NASDAQ:DKNG) growth prospects continue luring bullish commentary on Wall Street, with Argus Research analyst John Eade joining the party with a positive view on the sportsbook operator. That’s even though he acknowledges a lengthy road to profitability for the company.

DraftKings stock
DraftKings sportsbook at Resorts Casino in Atlantic City. Another Wall Street analyst is in love with DKNG stock. (Image: Press of Atlantic City)

Eade started coverage of the daily fantasy sports (DFS) provider last Friday with a “buy” rating and a $65 target, marking the second time in two days an analyst tagged DraftKings with that price forecast. His enthusiasm for the stock stems from the gaming company’s dominant positioning in the DFS market and its ability to convert those players to sports bettors in states where the company is authorized to offer the latter.

DraftKings is the leader in daily fantasy sports, with approximately 60 percent of the US market by revenue, according to industry sources,” said Eade in a note to clients.

The Argus analyst’s $65 estimate on the stock comes from applying the average price-to-sales ratio of 44x to the category in which DraftKings resides to expected 2022 revenue of $1 billion, and discounting that turnover figure back to 2020 dollars.

Grinding Higher

DraftKings hasn’t been a public company for six months yet, debuting in late April. But over that period, sell side analysts are, broadly speaking, fawning over the stock on the basis of expected expansion of internet casinos and sports wagering across the US.

Market observers’ enthusiasm for DraftKings is palpable for investors. In late August, the average price outlook on the name was $47, but that estimate has since vaulted north of $50. Over the past month, DraftKings stock is higher by nearly 37 percent, while the S&P 500 is lower by 5.42 percent. Seventeen analysts cover the name, with 11 having the equivalent of very bullish ratings on it.

The good times may just be getting started, because the iGaming and sports wagering industries in the US are in nascent stages of growth.

“The online gaming industry is in the early stages of growth, with only 3% of gross gaming revenue in the US generated online, compared to 45% in more mature online gaming markets such as the UK,” said Eade. “As more states loosen restrictions, we expect DraftKings to benefit from its market leadership.”

Patience on Profitability

Due to costs associated with acquiring customers as it enters new states, DraftKings is on a multi-year road to profitability, something that many market participants have reconciled and those thinking that’s a strike against the stock are learning the hard way that it’s not.

“Though we don’t expect DraftKings to post a profit this year or next, we do look for profitability in 2022 and solid growth over the remainder of the decade, as the company benefits from economies of scale,” said Eade. “We view DKNG as appropriate only for risk-tolerant investors as part of a diversified portfolio.”

On the upside, DraftKings can keep costs in check by converting DFS players to sports bettors, and the company carries no debt.