DraftKings Shows Momentum at a 2-Year High

DraftKings Shows Momentum at a 2-Year High

DraftKings recently reported a 57% YoY increase in Q3 revenue, reaching $790 million.
While its foundation lies in daily fantasy sports, DraftKings is venturing into the rapidly expanding online sports betting sector.
Since the Q3 earnings release on November 2nd, analysts have overwhelmingly expressed bullish opinions.

When considering an investment in DraftKings Inc. (NASDAQ: DKNG) stock, investors might want to bet on the over.

Even though it is currently trading at its highest level since November 2021, this digital sports entertainment leader exhibits significant momentum. Thanks to considerably improved financial results, its shares have tripled year-to-date. With expectations for even better performance in 2024, DraftKings seems poised for further success.

DraftKings’ recent surge follows a stellar third-quarter performance, akin to an MVP-caliber play. In the last month, the company revealed a 57% YoY increase in Q3 revenue, reaching $790 million, propelled by a 40% rise in monthly unique players (MUPs). Apart from growing its customer base, DraftKings benefited from increased customer wagers, successful promotions, and expansion into new jurisdictions. Although the company reported a net loss of $0.35 per share, this was narrower than the Q3 loss in the previous year and surpassed consensus expectations.

These results demonstrate that, even in a challenging discretionary spending environment, Americans continue to allocate funds to online gaming. While casino and horse racing operators experienced setbacks, consumers embraced the opportunity to gamble on their favorite sports and slots from the comfort of their homes. This positions DraftKings as an early favorite for success in 2024 when inflation and interest rate pressures are anticipated to subside.

**DraftKings’ Growth Drivers**

The company’s growth trajectory originates from its daily fantasy sports business, available in 44 U.S. states, various Canadian provinces, and the United Kingdom. Despite being a valuable flagship asset driving brand recognition, daily fantasy sports competes in a crowded and mature market, including competitors like FanDuel.

To diversify and tap into the faster-growing online sports betting (OSB) sector, DraftKings is expanding its reach. With existing partnerships with major sports leagues, the company is focused on entering new geographies. Kentucky recently granted a license to DraftKings Sportsbook in September 2023, and a deal was struck with the Passamaquoddy Tribe to launch an online sportsbook in Maine. Pending regulatory approval, Maine could become the 25th state where DraftKings operates mobile or retail sports betting.

The emerging iGaming business represents the next growth frontier, with DraftKings currently operating online casino games in eight states and Ontario, Canada. This summer, Pennsylvania joined the list of states allowing residents to access the Golden Nugget online casino app, featuring over 500 slots and table games.

In conjunction with robust top-line growth, decreasing customer acquisition costs position DraftKings for long-term profitability. Although the company has yet to report a quarterly profit, expectations for Q4 2023 suggest a significant improvement. Wall Street’s earnings per share (EPS) forecast for Q4 2023 is $0.14, a substantial improvement from the $0.53 per share net loss in Q4 2022. This could pave the way for a more favorable economic backdrop in 2024, attracting greater interest from deep-pocketed institutional investors.

**Upside Potential for DraftKings Stock**

Management’s forecast for 2024 revenue ranges from $4.5 billion to $4.8 billion. Since DraftKings is not yet profitable, this revenue estimate provides insight into the stock’s valuation. At the midpoint, the guidance implies generating sales of $10.00 per share.

Currently trading at 3.5x next year’s sales, there is considerable room for multiple expansion. Over the last 24 months, DKNG has traded between 2x and 17x sales. With a potential 50% expansion in the price-to-sales ratio to 7x, the stock price could double to $70.

Sell-side research firms also see substantial room for DKNG’s growth. Since the November 2nd Q3 earnings release, the majority of opinions have been bullish. On Monday, Susquehanna joined in by calling DraftKings a buy and raising its price target to $42. Other analysts have set price targets well into the $40s and even $50s.

In conclusion, online sports betting is gaining popularity in the U.S. and internationally, with DraftKings leading the way. The company is well-positioned to build on its success in 2024.

Before considering DraftKings, take note of gnews24x7’s tracking of top-rated analysts. While DraftKings currently holds a “Moderate Buy” rating, top-rated analysts suggest five alternative stocks that might be better buys.

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