Barry Jonas of Truist Securities raised his DraftKings target to $31 but maintained his hold rating given the recent jump in the stock.
Jonas explained in a Tuesday note that the recent run on the stock is likely the market willing to take a risk on DraftKings, as it seems an early duopoly in US sports betting between DKNG and FanDuel could be taking hold. The stock closed Monday at $31.24, which is up 174% so far this year but still significantly off its all-time high of $71.98 from May 2021.
The right time to buy DraftKings could be if the stock dips as “it’s clear” the increasingly rational sports betting market should benefit DraftKings and others, Jonas added.
DraftKings will report its earnings after the market closes Aug. 3 and hold a conference call at 8:30 am Aug. 4.
Raised expectations behind DraftKings stock target
Jonas introduced updated EBITDA estimates for this year and next, which increased his year-end target nearly 20%.
He now expects a loss of $272.4 million in adjusted EBITDA for all of this year. That is down from a prior estimate of $315 million loss based on guidance of a loss between $290 million and $340 million for the year.
The new estimate assumes $21.3 million in positive EBITDA in the second quarter before dipping back into the red, with a loss of $238.7 million forecasted for the third quarter given the marketing ramp-up around NFL betting season. Jonas expects football season to lead to $166.6 million in adjusted EBITDA for the fourth quarter.
Jonas also boosted next year’s adjusted EBITDA estimate to $253.2 million, more than five times higher than his previous estimate of $48 million for the entirety of 2024. He expects the same quarterly cadence in 2024 with negative EBITDA in the first and third quarters but positive in the second and fourth.
Hold climbing in US?
In May – seasonally the most important month of Q2 vis-à-vis the sports calendar – US online betting operators held 11.64% of bets. While a few states have not reported yet, that would be a new monthly record for online hold.
“I’d expect DraftKings to be right towards the top of that pack, as they’ve been,” said Jordan Bender of JMP Securities. “Higher hold flows through to the bottom line. We’re modeling that they will exceed the break-even they projected. It feels like there’s a bunch of check marks people are looking for and a quarter of profitability is one of them and I think you’re seeing the [stock] price reflect that.”
Why a big swing for DraftKings stock?
DraftKings has made some key changes this year that should all flow to the bottom line.
Two of those are related to cost. A rational promotional environment becoming the norm in US sports betting and a slower cadence in state launches means lower marketing spending than prior years. A 3.5% cut to headcount in February, meanwhile, means more sustainable corporate costs after layoffs.
An improving parlay product, meanwhile, means sustainable hold gains and therefore more revenue. CEO Jason Robins called more options for parlays a “win-win” for the company and its customers and an investor event in May.
“Six months ago, there [was] still uncertainty whether they had enough cash to get through 2023 or 2024, but their cash position is very strong now, so much so that they could make a run at PointsBet,” said Chad Beynon, a managing director and equity analyst at Macquarie Securities. “They’ve peeled back media commitments; there’s been internal cost-cutting and less launching means less spending. Fundamentally, they’ve probably seen the biggest improvement in the [gaming business] category.”
All eyes on DraftKings G&A costs
Investors will certainly be keyed into the general and administrative costs reported by DraftKings in the second quarter. Included in that line item is compensation for executive and non-executive personnel, which also includes stock-based compensation.
That number was $160.5 million in the first quarter of 2023, down 7.4% from $173.2 million in the fourth quarter of 2022.
DraftKings reported $187.6 million in G&A costs for the second quarter of 2022.
Other analysts agree on trajectory
David Katz, a managing director at Jeffries, expects this quarter’s results to reveal break-even earnings before interest and taxes. For context, DraftKings posted better-than-expected results for the last two straight quarters while improving end-of-year EBITDA loss guidance.
“The forthcoming 2Q23 results should reflect approximately break-even EBITDA, with wide-ranging estimates across consensus and some bulls expecting meaningful profits for the first time in DKNG’s history,” Katz wrote in a recent note on stocks reaching inflection points.
DKNG targeted single-quarter profitability by the end of the year, a milestone its archrival FanDuel proved capable of last year and chief competitors Caesars and BetMGM are still chasing.
“This time last year everyone was targeting the fourth quarter of 2023 for DraftKings to turn a profit,” Bender said. “That was before everyone realized they don’t need to burn cash and the parlay product got better. That kind of changed the timeline. FanDuel showed it could be done.”
Why is DraftKings stock rising now?
DraftKings is catching up to FanDuel in a few key markets, overtaking it in New York handle share for the first time in a single month in June, while making strides in Illinois, Indiana and Ohio.
“FanDuel, no matter what happens, will stick to its guns. I don’t think they really care if they lost 2% market share this month. Profitability is more important to investors right now,” Bender said. “When they want to put their foot on the gas, we’ve seen that it results in market share, but they want to put themselves in the right place when they do that.”
Product capabilities mature post-NFL
Beynon pointed to the DraftKings product coming together at the right time.
“The industry has continued to generate revenues ahead of expectations, partly thanks to this continuous movement towards single game parlays and the casual gambler. That started back in football season, mainly with FanDuel. And DraftKings has done a nice job kind of catching up,” Beynon said.
He added that the menu of betting options has become much closer between the two market-share leaders as DraftKings has become more comfortable with the in-house platform it acquired in its 2019 merger with SBTech and fully transitioned to during football season last year.
Bender echoed that sentiment:
“The product lagged FanDuel for several years, and now, with the investments they’ve made, that’s gotten a lot better. They launched many features during football season and got stronger throughout, but the NFL is ultra-competitive from an operator standpoint.
“There’s an element of seasonality here. As NBA and NHL rolled around, they were able to maintain that momentum, offer more products and price better, quicker. It looks to be all coming together for them.”
LSR reporter Matthew Waters contributed to this article.
