Investors who have seen the S&P 500 soar to new all-time highs once again this month may be wondering if they missed the boat. It seems like many of the best growth stock opportunities have become stretched, and if they can keep climbing, their future returns might not be as strong as the recent past.
But there are still a lot of great opportunities in growth stocks for those willing to dig into the markets. In fact, one stock could double within the next year, according to at least one Wall Street analyst. After worries about competition sent shares lower, here's why it might make sense to bet on DraftKings (DKNG +1.49%) over the next year.
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Predicting a turnaround
DraftKings and its biggest competitor in the U.S. market, FanDuel, got an early start in online sports betting thanks to their positions in the daily fantasy sports markets. The brand names and technology of both DraftKings and FanDuel parent company Flutter Entertainment (FLUT +0.74%) allowed them to grab the majority of the market as online sports betting has become legal state by state.
However, that position is now threatened by the rise of prediction markets. Platforms like Kalshi use yes/no futures contracts regulated by the Commodity Futures Trading Commission, which allows them to operate across the U.S. regardless of state laws on sports betting. While both DraftKings and Flutter have noted the threat of prediction markets throughout their recent earnings reports, Kalshi upped the stakes recently by introducing "combo" contracts, which allow people to build same-game parlays.
For those who aren't familiar with betting terms, a parlay is a single wager on multiple outcomes. If you pick correctly on all of them, the payoff can be significant. A same-game parlay is specifically for events in a single game, like betting on which team will win and whether the score will go over or under the betting line.
NASDAQ: DKNG
Key Data Points
DraftKings and FanDuel have expanded the number of events you can bet on within a game with minute details, including individual player stat totals in specific periods. Kalshi is now replicating that on its peer-to-peer event contracts platform. That's notable because parlays account for a lot of volume, and more importantly, a huge profit margin for DraftKings and FanDuel. Parlays have higher sportsbook holds (the amount the sportsbook keeps) than straight wagers.
DraftKings has taken steps to counter the threat of prediction markets. That includes the acquisition of Railbird, a licensed prediction contracts exchange. It plans to operate the exchange in markets where online sports betting is still illegal. FanDuel is also making plans to build a prediction contract exchange.
Despite those efforts Kalshi and other prediction markets have weighed on both stocks. DraftKings shares have dropped more than 35% from their recent highs. The more globally diversified Flutter has seen shares drop 23%.
One analyst is betting you could double your money
Needham analyst Bernie McTernan reiterated his $65 price target on DraftKings stock back in May following the company's first-quarter earnings report. He hasn't updated his opinion on the stock despite the recent developments in prediction markets. Still, his price target now represents upside of 105% from DraftKings' current stock price. Importantly, even the median price target of $51 per share represents significant upside in the stock.
There are good reasons to remain optimistic about DraftKings. First of all, it's at the forefront of a growing trend in the United States as more and more states legalize online sports betting. The North American market will grow around 11.5% per year through the end of the decade, according to Grand View Research, and DraftKings has historically grown its share of the market.
Image source: Getty Images.
While prediction markets threaten DraftKings' market share, investors shouldn't expect a significant challenge. DraftKings' brand and technology remain a big competitive advantage, enabling it to price bets for optimum profits while getting them in front of bettors to maximize action. DraftKings' brand strength has proven resilient over the years, even as big names like ESPN enter the market.
Finally, the regulatory aspect of the matter can't be ignored. Kalshi and other prediction markets currently operate in a gray area, while DraftKings and other sportsbooks are working within the state laws. If regulation negatively impacts prediction markets, DraftKings stands to gain a huge portion of their business.
The stock is an absolute bargain at this price with its enterprise value-to-EBITDA ratio of less than 22. Considering management's expectations for strong operating leverage and EBITDA growth of about 150% this year, that's a great price to pay for the company. The odds are good it'll go up from here, even if it doesn't double.
