There are two sides to every wager, and this was on display with DraftKings (DKNG 4.96%) late last week. Stifel upgraded the stock from hold to buy on Friday morning, just as BNP Paribas was downgrading shares of the online sportsbook operator from neutral to underperform.
Seeing a pair Wall Street pros go different ways on a battleground stock isn't unusual. What's an inefficient market without a dash of divergence? However, for a stock like DraftKings that has already more than tripled over the past year, it does lead one to wonder if the upticks can keep coming. Is the now-bearish BNP Paribas right to advise caution after the stock's wealth-altering 233% surge since the beginning of last year? Is Stifel's bullish turn -- one of two upgrades for DraftKings last week -- the correct call? Let's take a closer look.
Betting on DraftKings
Jeff Stantial at Stifel is feeling upbeat about DraftKings, lifting his price target from $40 to $45 alongside last week's upgrade. He feels that the promotional pressure from the aggressive launch of ESPN Bet two months ago is starting to subside. Stantial sees healthy industry trends and DraftKings-specific operational advantages positioning it to potentially exceed its guidance.
There's no denying the monster growth that DraftKings has seen in recent years.
- 2020: 90%
- 2021: 111%
- 2022: 73%
- 2023: 76% (through the first nine months)
What's even more impressive than delivering four consecutive years of spectacular top-line growth is how the bar keeps rising with every passing quarter. DraftKings began 2023 targeting a 33% increase on the top line. It now sees 65% growth for all of 2023 when it announces its fourth-quarter results in a few weeks. Don't be surprised if it winds up being conservative with that outlook, too.
Yes, DraftKings is still losing money. It costs a lot of money to roll into new markets. It just entered Vermont this month, giving it a legal betting presence in 26 states with its online sportsbook. It also costs a lot to land a new customer, even though the projected lifetime value of a new account is several times greater. The good news is that analysts see DraftKings turning the corner on adjusted profitability later this year, followed by positive reported earnings in 2025.
Momentum is strong after turning growth investor heads last year. The stock is also trading for half of where it was when it peaked at $74 three years ago.
Image source: Getty Images.
Betting against DraftKings
Alistair Johnson at BNP Paribas is the new bear on DraftKings. His $28 price target is more than double where the shares were a year ago, but still 26% below where the stock is currently trading.
Johnson feels that the same push to profitability that is driving some bullish turns could also be its undoing. The pressure to meet profit targets could find DraftKings paring back on customer acquisition and marketing costs, surrendering market share to hungry rivals in the process.
Analysts in general see revenue dramatically slowing at DraftKings this year. After four years of 65% growth or better, Wall Street's calling for a more modest 27% top-line jump in 2024. It's also not just the recent launch of ESPN Bet as a market share challenger. DraftKings stock is trading at a premium to other publicly traded sportsbook operators.
I still argue that it's not too late to buy into DraftKings. Don't let the potentially sharp deceleration in revenue growth scare you away. Check with those who steered clear of DraftKings after the company itself was forecasting a slowdown to 33% top-line growth a year ago. They missed out on one of last year's top performers.
DraftKings is unlikely to triple again in 2024. The climate for sports betting stocks is getting more competitive. However, with DraftKings in a position to start flexing its scalability advantages this year to become a bottom-line growth story, you probably don't want to bet against the stock.
