DraftKings Hit With ‘Sell’ Rating Ahead of Q4 Earnings Report

DraftKings (NASDAQ: DKNG) delivers its fourth-quarter earnings update next week, and one analyst is advising investors to take profits in the stock, which soared to start 2023.

In a note to clients Thursday, Roth MKM analyst Edward Engel lowered his rating on the sportsbook operator to “sell” from “neutral” with a $15 price target. That’s below where the stock resided entering Thursday’s trading session. The analyst noted one problem facing DraftKings is the cost of rolling out its offerings in new states.

During 4Q22 results, we expect mgmt to signal disappointing 1Q23 EBITDA as new state launches require more up-front investment than Street forecasts imply,” wrote Engel.

There may be something to the analyst’s thesis regarding state debuts. Mobile sports wagering recently went live, or will soon do so, in Maryland, Massachusetts, and Ohio — each of which is expected to have a material impact on topline growth for major sportsbook operators, such as DraftKings.

DraftKings Profitability Narrative Could Be Pinched

Entering this year, expectations were in place that DraftKings would turn profitable or break even on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fourth quarter. However, some analysts estimated it could happen sooner.

Roth MKM’s Engel pointed out that DraftKings’ scorching hot run to start 2023 underscores the potential fragility of the stock entering next week’s earnings report. That’s particularly if that update disappoints market participants.

“We expect 1H23E EBITDA losses greater than consensus and [to] reduce investor conviction in DKNG’s profitability narrative,” added the analyst.

Fanatics Could Be a Problem for DraftKings, Rivals

One of the primary reasons sportsbook operators are realizing profitability, or are getting closer to that status, is that the industry grew more selective about spending marketing and promotional dollars.

However, some analysts are concerned that the new-found focus on costs could be altered for the worse with the entry of new competitors into the space, namely Fanatics. Fanatics is lurking, recently entering the US sports betting arena and stoking speculation of a promotional spending war in the process.

We expect Fanatics to launch online sports betting by 1Q23 and reinvigorate concerns over an intensifying promotional environment,” according to Engel.

On the upside, state launch costs for DraftKings and rivals could be contained as 2023 moves forward. That’s because only North Carolina and Vermont are likely to approve mobile sports wagering this year.