Taking a punt on DraftKings’ share price

Since its market debut on 24 April this year, sports betting company DraftKings’ share price has soared.

Nov. 12, 2020

This article was originally published on OptoUnderstand What Really Moves Markets.

This is quite remarkable considering the coronavirus-induced freeze on sports events for most of 2020. With the company due to release its Q3 earnings on 13 November, should investors start placing their bets on DraftKings’ [DKNG] share price?

In a little over a month, DraftKings’ share price surged nearly 150%, closing at $43.70 on 1 June. This marked the beginning of what would be an incredible run, as on its best day of trading DraftKings’ share price peaked at $63.78 on 2 October — a 229.6% gain on its 24 April closing price.

However, DraftKings’ share price took a tumble as the company sold 32 million shares on 7 October at a price of $52. This caused the stock to fall 39.8% through October. As of 10 November, DraftKings’ share price was down 36.7% on its October peak at $40.36, but up 108.6% on its 24 April closing price.

A special acquisition

DraftKings’ share price began a somewhat unsteady rally after its Q2 earnings were released on 14 August. The company posted revenues of $70.9m, which beat estimates by $1.19m and represented a growth of 23.52% from the previous year’s revenues of $57.4m. It is worth noting that this figure includes acquisitions, such as the merger with SPAC Diamond Eagle — which is how the company went public. If you discount this, revenue was actually down 9.6% year on year.

DraftKings also announced a loss of $0.55 per share, which missed consensus estimates by $0.38, according to Seeking Alpha.

Although many sports events were put on hold this year, there are good prospects for the future of sports betting in the US. The three states that included measures to legalise betting on the election ballots (Maryland, Louisiana and South Dakota) all voted positively. This news, which broke on 4 November, pushed DraftKings’ share price up 5.6%. 

Moreover, Goldman Sachs [GS] reportedly expects sports betting to become a $28bn industry and online gambling to become a $9.5bn industry, according to Zacks Equity Research. Brad Erickson, analyst at Needham, believes the market could be worth up to $58bn when including online casino gambling.

Looking ahead to DraftKings’ Q3 result, the Zacks consensus is calling for a quarterly loss of $0.64 per share, and for sales to reach $132.19m. For the full year, analysts expect the company to post a loss of $1.67 per share and for sales to reach $526.08m, according to Zacks.

The future outlook

“The market for online betting has big room for growth,” Keith Noonan wrote in The Motley Fool.

“But DraftKings’ future will be shaped by an uncertain regulatory climate and the prospect of tough competition even if lawmakers take soft stances on the industry,” Noonan added.

Erickson initiated coverage of DraftKings in October, setting a price target of $70 and rating the stock a Buy.

“We view [DraftKings] as one of the leading beneficiaries as online sports betting and gambling take off in the US — an opportunity we size between $42bn and $58bn annually longer term,” Erickson wrote in a note to investors, according to The Street. If this prediction proves correct, DraftKings’ share price could have plenty of upside to come.

He went on to say that Needham expected “the regulatory tailwind to persist and believe online providers’ access to data creates a structurally better user experience versus brick and mortar”.

Meanwhile, the consensus among 22 analysts polled on CNN Money is to Buy the stock. This rating was given by a majority of 14 analysts, with the remaining eight all rating the stock a Hold.

The 19 analysts offering a 12-month share price forecasts on CNN Money provided a median target of $60, with a high of $76 and a low of $37. The median target would represent a 49.3% increase on DraftKings’ share price as of close on 10 November.

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