DraftKings Anointed Top Gaming Pick by Morgan Stanley

Posted on: March 2, 2022, 11:44h. 

Last updated on: March 2, 2022, 12:33h.

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

It’s not doing much to move the stock, but DraftKings (NASDAQ:DKNG) is garnering some support today in the form of bullish analyst commentary.

DraftKings
A DraftKings lounge at Gillette Stadium. Morgan Stanley issued bullish commentary on the stock today. (Image: New England Patriots)

Morgan Stanley highlights the daily fantasy sports (DFS) and online sportsbook giant as its top pick in its gaming and lodging coverage universe. The bank’s positive outlook on DraftKings arrives after the stock recently endured a spate of negative price target revisions and with the shares 69 percent below the 52-week high. However, the stock is higher by almost 14 percent over the past month.

We expect the US online sports betting/iGaming market to be very large, with a few market share winners, including DKNG,” said Morgan Stanley analyst Thomas Allen in a note to clients.

He reiterates an “overweight” rating on the stock with a $31 price target, implying an upside of 32 percent from the March 1 close.

Losses Will Give Way to Profits

DraftKings tumbled late last month after forecasting a wider-than-expected 2022 earnings before interest, taxes, depreciation and amortization (EBITDA) loss.

Further concerning investors are the operator’s costs, which some analysts believe will rise more rapidly this year than revenue. In other words, DraftKings is spending a lot of money to acquire customers, and it’s still not profitable. As for when profitability will arrive, it could be late next year or beyond. However, Allen believes there’s more to the story.

“While we agree that short-term losses will be considerable (still Street-low on 2022e EBITDA despite recent guidance), we believe the market is too short-sighted, and our state-by-state profitability build suggests long-term profitability to be much larger than forecast,” notes the analyst. “Public international stocks show that sports betting/iGaming is a profitable business, while past precedents show that stocks that can transition from revenue to profit stories deliver significant upside.”

He adds that DraftKings will eventually be an “attractive, profitable business.”

Catalysts for DraftKings

There are avenues for DraftKings to potentially deliver top-line surprises this year. For example, its recently issued 2022 revenue forecast does not include contributions from the pending acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG) nor does it reflect entries into Maryland, Ohio, and Ontario, Canada.

Allen’s bullish view on DraftKings arrives a day ahead of the company’s investor day, though he doesn’t expect that to be a stock-moving event. However, he sees the regulated US sports betting market swelling to $20.6 billion in 2025 as more states come aboard.

The analyst adds that it’s possible the gaming company tops revenue estimates this year, reinforcing a compelling total addressable market opportunity for the operator.

Twenty-nine analysts cover DraftKings — 17 of which rate it a “strong buy” or “buy,” while the other 12 rate the stock the equivalent of a “hold.”