Posted: August 17, 2022, 01:39 AM.
Last updated on: August 17, 2022, 01:39 AM.
DraftKings (NASDAQ:DKNG) stock has been in rally mode lately and Wall Street has noted some analysts are turning bullish on the name ahead of the football season.
In a DraftKings office. A previously bearish analyst upgraded the stock to “buy” today. (Image: Nevada independent)
In a note to clients today, Roth Capital analyst Edward Engel has upgraded DraftKings to “buy” from “neutral” with a new price target of $25, up $18. The new forecast implies an increase of about 20% from of the current levels. The soon to be released more attractive sports calendar is one of the reasons for the upgrade.
Online sports betting/iGaming stocks have historically outperformed between the middle of summer and the start of the NFL season, when the sports calendar swings from low to high,” Engel wrote.
The analyst’s new favorable treatment of DraftKings is noteworthy, as when he assumed coverage for the stock in October, he did so with a “sell” rating. At the time, the call made Engel one of the few dissidents on the DraftKings bull thesis, but he was proved right when the stock subsequently plummeted towards the end of 2021 and the first half of this year.
Boosting Chatter’s Profitability
Last week, DraftKings’ arch-rival FanDuel said it posted its first profitable quarter in US online sports betting, fueling speculation that other operators will soon join that club.
During the second quarter results, FanDuel, Caesars and PENN each showed accelerated paths to profitability, with FanDuel generating segment EBITDA of $22 million in the second quarter, Caesars Interactive approaching breakeven in July and Penn Interactive expecting profitability in the second quarter. 4Q22,” Engel added.
BetMGM also flirts with profitability. For its part, DraftKings offered its own round of solid 2022 forecasts earlier this month, although earnings before interest, taxes, depreciation and amortization (EBITDA) are still part of the equation.
The online sportsbook operator now forecasts revenue of $2.08 billion to $2.18 billion by 2022, up from a previous forecast of $2.05 billion to $2.17 billion. That means year-over-year revenue growth of 60% to 68%. Analysts had expected $2.1 billion. Boston-based DraftKings sees an EBITDA loss in 2022 of $765 million to $835 million — better than its previously forecast loss of $810 million to $910 million.
For DraftKings, it’s important to keep the promotional spend, which operators typically increase during the football season, reasonable until the end of the year. If that goal is met, it could pave the way for lower losses in 2023. Engel notes that in Q2 DraftKings ceded both iGaming’s market share and sports betting to rivals. But that could be a sign that the company is emphasizing efficiency and profitability over gaining market share at all costs.
Slowing economy can actually help DraftKings
Historically, a slowing economy has been a drag on the consumer discretionary sector – the group in which gambling stocks reside.
That doesn’t mean that DraftKings and rivals are being tweaked. Recessions often lead to lower ad spend, while motivating investors to look for higher-growth stocks — two scenarios that online sportsbook operators can take advantage of.
“While we don’t expect this to reduce OSB/iGaming CPAs much in 2H22, we believe that a growing story of falling advertising costs in 2023 could benefit major spenders like DKNG. Meanwhile, we also believe that investors will prefer secular growth stories such as OSB/iGaming stocks rather than economically sensitive sectors in an economically less favorable environment,” concludes Engel.
This post DraftKings stock upgraded to buy before football season
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