Shares of DraftKings (NASDAQ:DKNG) are lower by 2.50 percent in late trading. The rare tepid rating on the stock is the cause behind the Monday slump.
JPMorgan analyst Daniel Politzer initiated coverage of the daily fantasy sports (DFS) company today with a “neutral” rating and a $48 price target. Alone, Politizer’s grade on DraftKings stock is a departure from Wall Street’s overwhelmingly bullish take on the name. But so is the $48 forecast. That’s around where the shares reside at this writing and less than half the highest analyst projection.
Not surprisingly, Politzer cites valuation as one cause for concern with DraftKings. Investors are paying up for scarcity value because the company is currently the lone pure-play publicly traded online sportsbook operator in the space. The name trades at 7.6x expected 2025 revenue.
The stock is acting more as a vehicle for investor sentiment/enthusiasm than closely reflecting fundamentals,” said the analyst.
That enthusiasm could dampen as more companies go public in the space, a scenario that would be compounded by Flutter Entertainment (OTC:PDYPY) perhaps spinning off its FanDuel unit, which is the most direct competitor to DraftKings.
Longer Road to Profitability
Beyond valuation, the small number of analysts that aren’t smitten with DraftKings often cite a lengthy road to profitability as one of the reasons for their less-than-stellar ratings on the stock.
Politzer isn’t an exception to that trend. The JPMorgan analyst expects DraftKings will turn positive on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) in 2024. Many of his colleagues are expecting that to happen to in 2022 or 2023.
Additionally, his estimates for the overall US sports betting and online casino markets are far smaller than what other analysts are tossing around this year. Politzer sees domestic sports betting growing to $9.2 billion in 2025, with iGaming checking in at $4.9 billion, assuming 36 states approve both industries. Those forecasts are far cries from the $15 billion to $20 billion or higher projections some analysts are mentioning.
“If the number of states that legalize and launch sports betting falls short of our estimate, or if states legalize sports betting but do not regulate it in a revenue-maximizing manner (e.g., online sports betting, remote registration, multiple skins/operators, etc.), out-year industry and DKNG revenues may fall short of our forecasts, posing a downside risk to our estimates and DKNG’s stock,” said Politzer.
DraftKings Anticipates More Sportsbetting
Separately, Boston-based DraftKings said today it struck a deal with the Mashantucket Pequot Tribal Nation in anticipation of Connecticut soon approving sports wagering. The tribe is the operator of Foxwoods Resort Casino.
The deal makes DraftKings the venue’s official DFS partner. But it could provide inroads when the Nutmeg State authorizes sports betting.
The company currently offers online and mobile sports betting in 10 states. This figure could imminently grow with Michigan coming aboard and other states joining the party in 2021.
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