Pure-play growth stocks have run into a brick wall in the second half of 2023. Despite a surge in growth stock prices in the opening months of the year resulting from the excitement over artificial intelligence, investors have grown increasingly cautious about this particular asset class, and for good reason. The global economy is showing clear signs of a slowdown, inflation has been sticky all year long, and interest rates are expected to remain elevated for a prolonged period.
Online gaming and sports betting specialist DraftKings (DKNG 4.96%) has been an outlier in this regard. Thanks to a suite of improving financial metrics and a breathtaking long-term outlook, investors have bid up this online betting stock to the tune of 145.5% so far this year, making it one of the best-performing equities listed on the Nasdaq stock exchange in 2023.
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Is this sizzling growth stock still a buy? Let's take a closer look to find out.
DraftKings: A fundamentally based growth story
DraftKings earns money through three core operating segments: Sportsbook, iGaming, and daily fantasy sports. Thanks to a sharp rise in the number of states with legalized online sports betting (up to 38 plus Washington, D.C., at present) in recent years and a growing market share across all of its segments over the last 12 months, DraftKings has turned into a fundamentally driven growth story. In brief, the company's losses have been shrinking at a rapid clip, revenue has been growing exponentially, and the industry as a whole has been on a healthy growth spurt of late.
DKNG Net Income (Quarterly) data by YCharts
Best of all, DraftKings' long-term outlook is quite frankly incredible. Industry insiders expect the space to grow annually by 11.7% on average over the course of 2023 to 2030, according to a report by Grand View Research. With strong brand recognition, an emphasis on innovation, and a sterling reputation, DraftKings should be able to grow at least as fast as the overall industry -- if not faster, because of its proven ability to gain market share in a highly competitive environment.
What does this mean from a share price appreciation standpoint? If DraftKings shares simply appreciate at the same rate as the online sports betting industry over the next six years, the company's stock should provide a lucrative 94% return on investment over this timeframe. That rate of return surpasses the historical average of around 10% per year for major benchmark indices like the S&P 500.
Is it time to buy?
Wall Street's consensus price target implies that this online gaming and sports betting stock could rise by a healthy 28.5% over the next 12 months. That may sound high at first glance, but DraftKings has a lot going for it at the moment. A surge in new players stemming from the start of the NFL season, coupled with its proven ability to turn new customers into loyal long-term users, augurs well for its future growth prospects. Of course, there are unique legal risks inherent in this emerging industry that could negatively impact returns, which is an important issue prospective shareholders should bear in mind.
In sum, this trend-defying growth company sports a favorable risk-to-reward ratio, an attractive long-term growth profile, and a powerful brand that has been able to steadily gain market share in a fiercely competitive industry. As such, DraftKings screens as a must-own stock for risk-tolerant investors on the hunt for unusual growth opportunities.
