Sports fans have been a happy bunch lately. The NCAA basketball tournaments and professional golf's Masters Tournament were all competitive and exciting. They also drew millions of television viewers. For the first time ever, the women's college basketball title game outdrew the men's, averaging nearly 20 million viewers. That's all good news for online sports betting platform DraftKings (DKNG +0.44%).
These conditions may help explain why Goldman Sachs initiated coverage on DraftKings stock this week. Analyst Ben Miller and his team started the company with a buy rating and a price target of $60 per share -- about 42% above its closing price on Wednesday.
Still a risky bet
That premium to the recent stock price is similar to the growth that DraftKings expects in 2024 revenue compared to 2023. Miller is confident that the company can maintain revenue growth of at least 20% annually as online gaming gets more popular and gains regulatory approval in more states.
But DraftKings is already trading at a relatively high valuation multiple. The company isn't yet profitable, but its price-to-sales (P/S) ratio is high at about 5.5. By comparison, many traditional casino operators -- including those that have their own online betting platforms -- trade at P/S ratios of around 1.
That said, DraftKings is growing at a faster rate than traditional casinos. And the ultimate size of its addressable market could continue to expand if more states legalize online betting. That makes Miller's view look more reasonable. DraftKings does look like a good buy here, but investors should be fully aware that if the stock market broadly turns negative, a highly valued stock like DraftKings will likely drop more than the average stock.
