DraftKings Momentum is There, Caution Warranted, Says Analyst

Posted on: February 21, 2023, 01:27h. 

Last updated on: February 21, 2023, 02:30h.

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

There’s no denying investors were enthusiastic about the 2023 outlook revealed last week by DraftKings (NASDAQ: DKNG). It sparked one of the best intraday performances on record by the stock. But at least one analyst advises caution on the sports wagering equity.

DraftKings
Inside DraftKings’ Nevada office. An analyst sounded an optimistic but reserved tone on the stock. (Image: Nevada Independent)

In a new note to clients, Stifel analyst Jeffrey Stantial lauds DraftKings for its improved 2023 guidance and management’s increasing emphasis on reining in costs. Last week, the sportsbook operator raised the midpoint of its 2023 revenue outlook to $2.95 billion from $2.9 billion, while altering the midpoint of its 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) loss to $400 million from $525 million.

In retrospect, we are not surprised to see shares react favorably to management’s tone on cost discipline, given similar trends in other high-growth loss-making businesses. However, with DKNG rapidly approaching post-stimulus era highs, we think a more cautious outlook remains appropriate despite our constructive view on execution & potential guidance upside,” wrote Stantial.

The analyst maintained a “hold” rating on DraftKings, while lifting his price target to $21 from $17. The new forecast implies modest upside from the February 17 close.

Parlay Progress Pushing DraftKings Higher

DraftKings also told analysts and investors it could be breakeven or profitable on an EBITDA basis at some point in 2024. Among the reasons for the buoyant outlook is an improved product mix, including same-game parlays (SGPs).

A territory mastered by FanDuel, SGPs entice bettors with big odds and the convenience of all legs being decided over the course of just one event. The wagers are essentially fliers or lottery tickets, and thus, economical for operators.

“As discussed above, product-driven structural improvements to hold rate were a key driver of Q4A outperformance. This primarily reflects improving parlay penetration, in particular same-game, with DraftKings’ parlay mix improving +800bps Y/Y during the quarter. On a full-year basis, improving parlay penetration drove ~70bps of cited ~120bps hold rate expansion, with optimized trading factoring for ~30bps and favorable sport outcomes for ~20bps,” added Stantial.

DraftKings management also told analysts that it’s making progress on in-house SGP offerings, indicating that in the future, the company may be able to further trim costs by reducing dependence on third-party technology.

Consumer Pullback Could Pinch DraftKings, Rivals

With pandemic-era stimulus fading, DraftKings and other gaming companies could be vulnerable to a potential 2023 slowdown in consumer spending.

While we’ve heard some concerns on potential consumer pullback here given the low win rate, management cited zero signs of related churn so far while they believe similar trends hold for best-in-class FanDuel. While encouraging, we believe this is a risk worth continuing to monitor given the semi-fixed nature of gambling budgets,” concluded Stantial.

While DraftKings management didn’t wax extensively on consumer discretionary issues, signs are mounting that consumers are scaling back. For example, Walmart (NYSE: WMT) CFO John Rainey said Tuesday that consumers are still under pressure – comments that sparked a sell-off in consumer equities, including gaming names.