Markets

Take a Chance on DraftKings, Says Top Analyst; It Is a Bet That Will Pay Off

DraftKings’ (DKNG) short time as a publicly traded company has been a huge success. With a year-to-date share gain of 478%, the online sports betting (OSB) player is riding a momentum wave that shows no signs of slowing down yet.

But this could only be the opening salvo. DraftKings operates in a sector which is just getting started and might turn into a very lucrative industry. In fact, Needham analyst Brad Erickson estimates the OSB industry could be worth “between $42 and $58 billion annually longer-term.” The 5-star analyst expects DraftKings to make good use of the opportunity at play.

Erickson counts two significant reasons why online gaming and sports betting has “the potential to create many tens of billions of incremental equity value.”

The first is regulatory. Covid-19 has left big holes in state budgets which need to be filled somehow. The windfall from expected OSB tax revenue could therefore see many states accelerate regulation. The second reason is technological. Brick & mortar competitors will find it difficult to compete with online gambling providers' access to data which leads to a “better customer experience and accordingly, higher retention and customer lifetime value.”

And where does DraftKings fit in?

Erickson explained, “We believe the company has a leading brand with a target-rich rolodex related to its market-leading fantasy sports business. DKNG is pursuing a product & experience-first mentality that we believe will be the primary determinant of success in the space. Also, the company actively uses a data-centric approach to customer acquisition with both operational and capital advantages versus competitors.”

Erickson also points out that with an enterprise value of 20 times his 2022 revenue estimate, the stock might be considered expensive. However, the analyst disagrees with such an argument, saying it is “no time to get hung up on valuation.”

Erickson believes DraftKings’ ability to acquire new customers as new states come on board is one which will resonate with investors, who will also appreciate the company’s “runway for growth, strong market share in early states and leading OSB platform technology.”

With this analysis, it's not surprising that Erickson initiated coverage of DraftKings with a Buy rating. His $70 price target implies a 13% upside from the current shares price of $61.83. (To watch Erickson’s track record, click here)

So, that’s Needham’s view, what does the Street of the Street have in mind? The current outlook offers a conundrum. On the one hand, based on 12 Buys and 4 Holds, the stock has a Strong Buy consensus rating. However, after soaring so high this year, the analysts expect shares to cool down and anticipate downside of 12% over the coming months. (See DraftKings stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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