DraftKings investor day awes most, not all

November 14, 2023 8:22 PM
Photo: Shutterstock
  • David McKee, CDC Gaming Reports
November 14, 2023 8:22 PM
  • David McKee, CDC Gaming Reports

Despite falling on the same day as the launch of ESPN Bet, DraftKings forged ahead with its Nov. 14 investor day “and the content didn’t disappoint us,” reacted J.P. Morgan analyst Joseph Greff. His opposite number at Deutsche Bank, Carlo Santarelli, was less impressed, calling the session “largely as expected, with management telegraphing much of what was included in the presentation.”

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A third analyst, Barry Jonas of Truist Securities, offered that DraftKings’s targets for cash flow, whether near-term or distant, were “all above our expectations.” He added, “[We] see a buy opportunity today.” However, he kept his price target for the stock at $45 per share.

“Importantly,” Jonas resumed, “DKNG’s guidance only accounts for states that are launched today.” He said that the company believed it stood to realize as much an additional $6.2 billion per year in cash flow from the expanded legalization of igaming.

Based on the status quo (which includes a 30 percent market share), DraftKings projects that its cash flow will grow from $900 million or more in 2025 to $1.4 billion in 2026, then to $2.1 billion in 2028. (No 2027 target was given.) Greff reckoned that DraftKings would have cash on hand of $3.6 billion in late 2026, worth almost $7 per share. “These targets are at or above our current in-print estimates,” Greff added.

The Morgan analyst also noted a DraftKings feature that the competition doesn’t have: “Progressive Parlay, where players can win even if one or more legs of a parlay miss; this has the potential benefit of increasing its leg count, hold percentage, and ultimately gross margins.”

Greff credited DraftKings with “a creditable job” of pointing out its other advantages, as well as having “also pulled back the kimono and shared greater details on how it will generate increasing profitability over the next 3+ years.” The latter includes reducing promotional outlays and accelerating customer acquisition.

DraftKings’s shares ended the day at $35.44, well above Santarelli’s $31 price target. He believed that achieving the DraftKings growth story was contingent on several elements falling into place, including a continued “robust” sports-betting market. Also, new competitors, such as ESPN Bet, would have to have little or no effect on the company, which would also have to see no adverse outcome from promotional cutbacks.

“That being said, given the upside potential from further, and needle moving, legislative successes, the outlook becomes more robust,” Santarelli chronicled. He noted that there were risks along the profitability path, including legislation falling in line, although DraftKings excluded several new markets from its projections. The analyst stayed with his “Hold” rating.

Jonas, the most enthusiastic of the three analysts, reported that DraftKings estimates it owns 39 percent of online sports-betting handle and almost as much of the eventual revenue. It also enjoys a 27 percent slice of igaming. “Encouragingly, handle has continued to grow Y/Y in each state vintage,” Jonas added.

“While there are several paths” to Deutsche Bank’s $5.4 billion DraftKings revenue target for 2027, “one must be cognizant of the interplay between promotions coming out, and market [gross gaming revenue], as well as market share,” Santarelli wrote. “We think the balancing of this dynamic is where the risk resides.”