DraftKings Earns ‘Buy’ Rating From Once Bearish Analyst

DraftKings (NASDAQ:DKNG) stock is in rally mode of late, and Wall Street is taking note. Some analysts are turning bullish on the name ahead of the start of football season.

In a note to clients today, Roth Capital analyst Edward Engel upgraded DraftKings to “buy” from “neutral,” with a new price target of $25, up from $18. The new forecast implies upside of about 20% from current levels. The soon-to-arrive, more attractive sports calendar is one reason for the upgrade.

Online sports betting/iGaming stocks have historically outperformed between mid-summer and the start of NFL season, when the sports calendar swings from trough to peak,” Engel wrote.

The analyst’s newly favorable treatment of DraftKings is noteworthy because when he assumed coverage of the stock last October, he did so with a “sell” rating. At that time, the call made Engel one of the few dissenters on the DraftKings bull thesis. But he was proven correct, as the stock subsequently tumbled into the end of 2021 and through the first half of this year.

Profitability Chatter Perking Up

Last week, DraftKings’ archrival FanDuel said it posted the first profitable quarter in US online sports betting space, fueling speculation that other operators will soon join that club.

“During 2Q results, FanDuel, Caesars, and PENN each demonstrated accelerated paths to profitability, with FanDuel generating $22M segment EBITDA in 2Q, Caesars Interactive approaching break-even in July, and Penn Interactive expecting profitability in 4Q22,” added Engel.

The online sportsbook operator is now projecting 2022 revenue of $2.08 billion to $2.18 billion, up from a prior outlook of $2.05 billion to $2.17 billion. That implies year-over-year revenue growth of 60% to 68%. Analysts were expecting $2.1 billion. Boston-based DraftKings sees a 2022 EBITDA loss of $765 million to $835 million — better than the previously forecast loss of $810 million to $910 million.

For DraftKings, a key is keeping promotional spending reasonable, which operators usually ramp up during football season into year-end. If that objective is met, it could pave the way for lower losses in 2023.

Engel notes DraftKings ceded both iGaming and sports wagering market share to rivals in the second quarter. But that could signify that the company is emphasizing efficiencies and profitability over gaining market share at all costs.

Slowing Economy Could Help DraftKings

Historically, a slowing economy is a drag on the consumer discretionary sector — the group in which gaming stocks reside.

That doesn’t mean DraftKings and rivals will be pinched. Recessions often prompt reduced advertising spending while motivating investors to seek out higher-growth stocks — two scenarios that could benefit online sportsbook operators.

“While we don’t expect this to reduce OSB/iGaming CPAs much in 2H22, we believe a growing narrative of declining ad costs in 2023 could favor big spenders such as DKNG. Meanwhile, we also believe investors will favor secular growth stories such as OSB/iGaming stocks rather than economically sensitive industries during an economically softer backdrop,” concludes Engel.