DraftKings Upgraded, Analyst Sees Outlook Besting Headwinds

Posted on: January 19, 2024, 05:17h. 

Last updated on: January 19, 2024, 05:17h.

After more than tripling last year, shares of DraftKings (NASDAQ: DKNG) scuffled to start 2024 as state-level data indicated a modest loss of market share to rivals ESPN Bet and FanDuel. At least one analyst believes the DraftKings pullback is buyable.

DraftKings stock
A DraftKings billboard appears at Times Square in New York City after the company went public in April 2020. The stock was upgraded by Stifel analyst Jeffrey Stantial. (Image: NASDAQ)

In a new report to clients, Stifel analyst Jeffrey Stantial upgraded shares of the online sportsbook operator to “buy” from “hold” while lifting his price target to $45. That implies upside of 19.6% from today’s close.

We take advantage of the slight correction, as we argue near-term share headwinds are fading (ESPN Bet promos; sports seasonality) enabling investor focus to shift back to the fundamental outlook where healthy same-state handle growth, structural hold-rate expansion, marketing/promo discipline, and fixed cost efficiencies pose upside to an already impressive guided earnings before interest, taxes, depreciation, and amortization (EBITDA) path,” wrote the analyst.

With fourth-quarter earnings reports slated to arrive over the next several weeks, operators with online sports wagering exposure, including DraftKings, already told investors that results could be sapped by bettors’ good fortune last November.

For DraftKings, Short-Term Pain, Long-Term Gain

Stantial estimates that DraftKings shed 600 basis points in online sports betting handle in the September through December period due in large part to the November debut of ESPN Bet and FanDuel’s dominance among NBA bettors.

Regarding ESPN Bet, data confirm bettors have warmed to the new Penn Entertainment (NASDAQ: PENN) platform, but the operator spent more on promotions than it did with Barstool Sportsbook and those incentives are now being cut. Promo spending has long gotten bettors in the door, but retaining them is a different ballgame. Stantial says DrafKings has the goods for superior client retention.

“Bears point to risk that ESPN Bet user retention proves strong, with a more credible path to market share upside on improving product & media integrations (e.g. bet slips were recently added),” added the analyst. “However, user retention is driven primarily by betting product quality, and our checks suggest DraftKings/FanDuel remain clear best-in-class for now with opportunity in 2024 to improve breadth of markets & bet types, UX, user customization, and value-add features (bet tracking; early cashout).”

Another Near-Term Issue for DraftKings

Stantial acknowledged his call on DraftKings is “not without controversy” because FanDuel parent Flutter Entertainment (OTC: PDYPY) is on pace to list its shares on the New York Stock Exchange (NYSE) on Monday, Jan. 29. It’s possible some retail investors could liquidate DraftKings positions in favor of the larger, more profitable Flutter.

Still, there are compelling reasons to own DraftKings, including robust same-state trends, the potential for strong free cash flow (FCF) generation, and iGaming growth — a segment in which the operator is emerging as a clear lead.

“We see a compelling FCF trajectory & upward bias to Consensus estimates, reflecting continued execution on product, healthy same-state handle/GGR growth trends, incremental state legalization, structural hold-rate expansion, sustained rationality in market-wide marketing/promos, and newfound fixed cost discipline & scale efficiencies,” concluded Stantial.