DraftKings Stock Could Deliver Major Post-Earnings Move

Posted on: November 12, 2020, 09:54h. 

Last updated on: November 12, 2020, 10:16h.

Sportsbook operator DraftKings (NASDAQ:DFS) steps into the earnings confessional on Friday, Nov. 13 to deliver third-quarter results. Some traders are banking on a big move by the stock. The direction of that reaction remains to be seen.

DraftKings stock
DraftKings reports third-quarter earnings Friday and traders are bracing for a big move. (Image: Wall Street Journal)

In what will be the company’s third earnings report since going public in late April, Wall Street expects DraftKings will lose 62 cents a share on sales of $131.8 million. That revenue forecast is slightly below the midpoint of the $131 million to $133 million range projected by the operator last month.

Owing to the domestic sports shutdown forced by the coronavirus pandemic earlier this year, the July through September period’s sports calendar was unusually active. The NBA, NHL, Major League Baseball (MLB) and college and professional football were all on the docket. Market participants priced that into DraftKings stocks, sending the name from around $33 on July 30 to nearly $59 on Sept. 30, the last day of the third quarter.

However, the shares have tumbled 35.43 percent since hitting a record high of $64.19 in early October. The fall came on news of a dilutive secondary offering and massive selling by insiders.

Earnings Expectations

The combination of the return of sports and still-limited entertainment options because of the pandemic likely boosted unique user data for DraftKings. But as is often the case, analysts and investors are likely to scrutinize how much the company is spending to acquire those new customers.

The company said it expects monthly unique players to be 1.02 million for the quarter, though it anticipates its sales and marketing expenses to hit $200 million to $210 million during the quarter,” according to Barron’s.

Still, Wall Street loves DraftKings stock. Twenty-two analysts cover the name, 14 with the equivalents of “buy” or “strong buy” ratings, while the other eight are neutral on it. The average price target on sportsbook operator’s shares is just under $59, while some forecasts stretch into the $70s. In order to reach the consensus estimate, DraftKings would need to rally 41.4 percent from current levels.

That’s unlikely to happen in a single day. But options market data indicates traders are wagering on a sizable post-earnings move for the stock. Options activity in DraftKings stock imply a move — in either direction — of 10 percent to 13 percent following the company’s report tomorrow. If that happens, it’d be enough to carry the stock into the mid-40s, or down to the mid-30s.

Potential Surprises

With Election Day bliss attributable to sports betting vote outcomes in Louisiana and Maryland baked into the stock, DraftKings still has other avenues to engineer pleasant surprises for investors.

Notably, the operator could tell the investment community that its third-quarter loss was narrower than expected, and/or that its loss for the October through December period will be below expectations.

Additionally, it could tell the Street that it’s spending less on promotions while still attracting and retaining customers. It remains to be seen if the company will comment on these scenarios. But with some analysts estimating the time line to profitability at 2023, DraftKings’ ability to reduce that period would likely be a boon for the stock.