DraftKings (NASDAQ:DKNG) is pointing higher in late trading Thursday despite being on the receiving end of two price target reductions by Wall Street analysts.
In a note to clients today, Citi analyst Jason Bazinet trimmed his price forecast on the sportsbook operator to $20 from $26, but maintains a “buy” rating on the shares. The $20 target implies upside of 60% from the July 6 close. Amid rising recession jitters, advertising and entertainment equities are being punished. But Bazinet says the repudiation of DraftKings may not be justified.
Recession risks are usually most acute for firms with high ad exposure and lower levels of contractual revenue,” says the Citi analyst.
He says the market is punishing companies with lower contractual revenue as much as lower margin companies, and that shouldn’t be the case. While leaving revenue projections mostly unchanged, Bazinet forecasts wider losses for DraftKings in 2023, owing to higher expenses.
For investors, a long-running concern with DraftKings is the company’s cash position. That worry is amplified due to an increasingly time line to profitability, and financial markets signaling the current environment isn’t hospitable to money-losing firms, regardless of industry.
Susquehanna analyst Joseph Stauff, who pared his DraftKings price target to $20 from $33 while keeping a “positive” rating on the stock, says the gaming operator will have $700 million in excess cash through 2024. That assumes launches in Kansas, Maryland, and Ohio in January 2023. The daily fantasy sports (DFS) firm had $1.77 billion in cash at the end of the first quarter.
Stauff points out that if the California mobile sports wagering ballot proposal passes in November — DraftKings is one of the backers — the company could see launch costs of $300 million over six months, commencing in the third quarter of 2023. That could give way to a large earnings before interest, taxes, depreciation and amortization (EBITDA) ramp in late 2024.
The Susquehanna analyst says DraftKings has near-term upside potential, and that the operator is self-funding its way to profitability.
To this point, 2022 has been sluggish on the sports wagering legalization front, with just Kansas and Maine — two small states — getting into the game. Operators and investors are still waiting for mobile betting to go live in Maryland and Ohio, which are expected to be vibrant markets.
That is to say, California is a legitimate potential catalyst for DraftKings and its rivals. As the largest state, it’s undoubtedly the crown of the domestic regulated sports wagering industry. With Texas and Florida unlikely to pass mobile betting laws over the near-term, the importance of California doing so is seen as vital to the industry.
However, Proposition 27 — the initiative for mobile sports betting — faces stiff opposition from Proposition 26 — a tribal-backed plan that wouldn’t allow online betting. Some California tribes are supporting Prop 27 because there will be opportunities to drive revenue through partnerships with out-of-state operators, such as DrafKings.