Jeffrey Stantial of Stifel upgraded DraftKings to buy Thursday with a $45 target price after the DKNG stock dropped recently on some short-term issues.
The future also holds a couple of potentially negative catalysts, but he suggests getting in now before waiting for those to taper off.
The market heeded Stantial’s advice: DKNG closed Thursday at $37.54, up 7% from Wednesday‘s close on nearly 26.4 million volume.
Why is DKNG stock a buy?
Stantial noted the stock price’s pullback early this year from its 52-week closing high of $39, hit on Dec. 1.
That drop is mostly from a dip in handle share, he explained, citing ESPN Bet‘s launch and promo activity, as well as FanDuel NBA product as main reasons.
Stantial expects those issues will have a smaller impact in the first quarter. There is even a chance to acquire some of those customers that took advantage of ESPN Bet promotions as those bonuses dry up, he added.
Fundamentals in the DraftKings business, like handle growth in vintage states and structural hold, are also all healthy to accelerating, Stantial said. There is a credible path to a hold of 11% to 12%, compared to the 9.5% reported from its third-quarter earnings.
Stock competition coming
DraftKings stock has been one of the most direct ways to invest in the US sports betting industry, which naturally made it a popular stock.
FanDuel parent Flutter, however, hopes to see some of that market volume shift when it launches its US listing on Jan. 29.
Stantial admits the Flutter listing, as well as weaker results hurting hold in the fourth quarter, mean his call is “not without controversy.” Previous comments from management suggest that the challenging November could lead to an adjusted EBITDA guidance downside of $75 million, he added.
“However, we prefer to own into forthcoming market share stabilization/inflection vs. waiting to de-risk these catalysts …” Stantial said.
Competitor growth ‘primary’ DKNG risk
Stantial did not discount movement seen from second-tier operators throughout the NFL betting season, calling product-driven market share gains the “primary structural risk” to his upgrade call.
He specifically called out four operators to watch when it comes to sports betting and iGaming market share:
Some long-term deconsolidation of DraftKings and FanDuel market-share leads is possible, he said, if those well-capitalized operators continue working on product improvements.