DraftKings Stock Remains a Good Bet on a Pullback

Still a few days shy of its one-month anniversary as a public company, DraftKings (NASDAQ: DKNG ) stock is rapidly becoming the toast of Wall Street.

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Shares of the daily fantasy sports (DFS) company and sportsbook operator are up 45% since the April 24 initial public offering. Under any circumstances, that’s an impressive performance, but with DraftKings, it’s even more so for a couple of reasons.

First, the U.S. sports scene shutdown in mid-March due to the novel coronavirus, meaning for half of that month, all of April and until NASCAR’s return last week, DraftKings customers had no opportunities for DFS play and limited wagering opportunities.

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Second, the company delivered its earnings report last week and, in unicorn-esque fashion, reporteda wider-than-expected losseven as revenue jumped 30% to $88.54 million.

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Not all young companies get a pass on losing money, even when revenue is rising, but broadly speaking, that’s the treatment DraftKings is getting. On Monday, three analystslifted price targetson the stock after one did so last week.

Said another way, in the span of two trading days, four of the five analysts covering the stock during that time boosted price estimates on the name.

Not Playing Around, But Outlook Remains Strong

On Tuesday, Goldman Sachs Stephen Grambling initiated coverage of DraftKings, throwing rain on the parade he was joining with a “neutral” rating, but his $32 price target implies upside of about 8% from the May 19 close. The analyst’s quibble, albeit modest, is that current multiples adequately reflect the various opportunities in front of DraftKings and that it’s goingto take some timefor management’s goals to be realized.

“We believe both sports betting and iGaming are poised to see accelerated consumer adoption in response to COVID-19 and subsequent social distancing protocols across sports and gaming. However, we believe valuation is largely reflective of these unique growth opportunities at 8X management’s fully-ramped earnings before interest, taxes, depreciation and amortization (EBITDA) target which we estimate could take 7+ years to achieve, leaving more limited upside.”

For those that don’t speak analyst, I’ll cut through the lingo for you: prevailing sentiment on Wall Street is that DraftKings is comparable to aninternet or cloud computing stockand not directly comparable to a traditional sportsbook operator like a William Hill (OTC: WMHY ). Grambling added DraftKings is worthy of closer examination on pullbacks.

Whether one bets on sports or participates in DFS or not, the comparison isn’t as far flung as meets the eye. Yes, DraftKings has some brick-and-mortar sportsbooks, but itsbread and butter is higher marginonline and mobile wagering. Hence, the internet comp.

With a DFS duopoly shared with FanDuel and robust brand recognition, DraftKings benefits from customer loyalty and subsequent revenue upside, similar to the cloud model.

DraftKings’ technology roots are important today and beyond. By the company’s own admission, it’s bleeding $15 million to $20 million a month while major domestic sports are absent. Compare to that to some traditional casino operators that are saying they’re burning $2 million or more a DAY while properties are closed due to Covid-19.

The Bottom Line on DraftKings Stock

Relevant to investors is that DraftKings has multiple avenues for justifying the internet/growth stock comparisons and multiples.

Two of the next big things in betting are still in their infancy,those being esportsand iGaming, or online casinos. Wagering on esports is a new growth frontier in the sports betting world, one where DraftKings is already saying it sees loads of potential.

As for online casinos, the coronavirus shined a light on that opportunity. As just one example, iGaming revenue in Pennsylvania – one of a small number of states currently permitting internet casinos – surged 73% month-over-month in April. DraftKings landed an iGaming permit there on May 1.

Todd Shriber has been an InvestorPlace contributor since 2014.As of this writing, he has a small position in DraftKings.

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