DraftKings Stock Has Double Potential, Says Jefferies Analyst

Posted on: May 16, 2022, 07:49h. 

Last updated on: May 16, 2022, 10:50h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

After shedding more than half its value just this year, DraftKings (NASDAQ:DKNG) is clearly among this year’s worst-performing gaming equities. But that dramatic decline is also encouraging some bullish commentary on the shares.

DraftKings stock
DraftKings stock highlighted at the Nasdaq market site. The shares got a lift today from Jefferies analyst David Katz. (Image: Nasdaq)

The stock is higher in early trading Monday, as Jefferies analyst David Katz resumes coverage with a “buy” rating and a $33 price target, implying upside of 162% from current levels. Katz acknowledges that despite marketing spending that originally eclipsed expectations, DraftKings maintains enviable positioning in the regulated online sports wagering market.

While we recognize the marketing intensity exceeded our initial expectations, we maintain DKNG is among the best positioned with a strong brand, first-mover advantage, resources, and strategic clarity,” Katz wrote in a report. “To prove this point, despite the competition, DKNG has generally held on to >20% handle market share in key markets, and consistently scored well in our survey and brand matrix.”

Since last year, analysts and investors have grown increasingly concerned about DraftKings’ cash burn rate, the fickle nature of casual sports bettors — many of whom simply hunt for sign-up bonuses — and a lengthening time line to profitability. Those are among the factors contributing to a 72% decline by the stock over the past 12 months.

DraftKings Cash Position Is Decent

Another lingering concern for DraftKings investors, though longer-ranging, is the company’s 2021 $1.15 billion convertible bond sale. That entitles bondholders to convert those bonds to shares of common equity at $70, or more than five times where the stock trades today.

Katz says the company has the capital to handle the conversion, while supporting a potential move into coveted California. That assumes voters there opt for a commercially backed sports wagering ballot initiative in November over a competing, controversial tribal gaming proposal.

“The company ended 1Q22 with $1.77B of cash and a $1.265B zero coupon convertible debt that will not mature until 2028 or become convertible in 2027, subject to certain conditions,” notes the Jefferies analyst. “Currently, we expect cumulative cash burn between 2Q22 and 4Q23 to be approximately $950M, and an additional $675M for California at current burn rate, and believe the current cash balance is sufficient.”

The California measure supported by DraftKings and other commercial operators imposes a “10% tax on sports-wagering revenues and licensing fees,” according to Ballotpedia. That’s reasonable, given the state’s reputation for taxing nearly anything that moves. But advertising in California will be expensive and likely even more costly than it is in New York. While New York City is the largest media market in the country, meaning its advertising rates are the highest, California is home to five of the top five US designated market areas (DMAs).

DraftKings Stock Could Get Boost from GNOG Buy

Katz also lauded DraftKings’ recently completed acquisition of Golden Nugget Online Gaming (GNOG), pointing to “meaningful synergies” from the standpoints of both marketing spending and revenue.

Potentially enhancing the potency of the GNOG deal for DraftKings is that the purchase is more about iGaming than it is sportsbooks. As the American Gaming Association (AGA) recently noted, online casinos are proving far more impressive from a margin perspective than their sportsbook counterparts. The 31 US jurisdictions where sports wagering is legal generated $4.33 billion in gaming revenue (GGR) last year. But the six states permitting iGaming saw GGR of $3.71 billion from that activity.