DraftKings has the structural advantages to become the Uber of the US sports betting market, according to one financial analyst.
Speaking to LSR this week, Canaccord Genuity analyst Michael Graham said the current market structure around DraftKings stock was reminiscent of rideshare.
“We cover Lyft and Uber, we co-managed on both of those IPOs,” Graham said. “And we recognize [sports betting] is similar to that. It has all the hallmarks of a duopoly.”
One reason for that, Graham said, is the installed user base the market leaders enjoy.
“The same way Uber is taking taxi users and selling into Uber Eats at virtually no cost, DraftKings is cross-selling DFS players into sports betting,” Graham explained.
Canaccord bullish on DraftKings stock
Canaccord recently raised its target price for DraftKings stock to $50, pointing to “recent positive datapoints around platform engagement and the legalization progress”.
Specifically, Canaccord highlighted ‘The Match 2’, which was DraftKings’ biggest golf betting event ever, doubling the previous record.
However, Graham also acknowledged the share price was at a “premium level” and DraftKings needed to deliver an “immense amount of execution” to justify it.
“Yes it’s a premium but my background is covering disruptive companies in the internet space,” Graham said. “And one of the biggest mistakes I’ve seen is being too focused on fundamentals early in the life cycle.
“We’re trying to take a long-term view. One of our major pillars is that DraftKings can use the next couple of years to build entry barriers to the market.”
Building sports betting barriers to entry
Graham pointed to the built-in player base as one barrier, along with the ability to do national marketing campaigns when the time comes.
“We saw it with [e-commerce platform] Wayfair. When they started spending nationally on marketing and brand building, they really gained leverage,” Graham said.
He also suggested DraftKings would use its technological prowess to develop sharper in-play models, helping to boost margins.
Downside risks remain for DraftKings
As for the execution risks, Graham warned states might legalize betting at a slower rate than expected.
It’s worth noting that states containing a third of the US population – California, Texas, and New York – face significant barriers to sports betting legalization.
Graham also highlighted some risk for the DraftKings stock case if similar companies started listing. After all, price is shaped by supply and demand, and DK is the only pure-play US sports betting opportunity.
“Scarcity is an important part of why the stock has so much momentum,” Graham said. “Competition for investment dollars is a little different than operating competitiveness. But if Flutter does spin out FanDuel for example and list that on the Nasdaq, that could have an impact.”