DraftKings Product Investment Could Be Catalyst, Says Analyst
DraftKings (NASDAQ: DKNG) shares have declined 9.52% since the beginning of the year, a trend that seemingly contradicts the operator’s robust technology infrastructure and its prominent position in product innovation.
Jefferies analyst David Katz emphasized the sportsbook giant's investment in products, particularly in-game wagering, in recent commentary related to the firm's revised Franchise Picks list. This is a set of 28 catalyst-laden stocks priced in a way that indicates potential growth. DraftKings is the sole gaming brand presently included in the list. Katz assigns a “buy” rating to the stock with a price target of $60.
"We think investments to enhance DKNG products, including the recent focus on in-play betting, could be a key product differentiator and growth driver,” notes Katz. “Further, we expect that the evolution of existing markets, additional states legalizing over time and the Jackpocket acquisition represent incremental positives.”
Last year, DraftKings unveiled its $750 million purchase of Jackpocket, an online lottery delivery service. Fifty-five percent of the purchase price was settled in cash, while the rest was financed through the buyer's stock. Considering that lottery participants typically withstand recessions, the Jackpocket partnership may enhance DraftKings’ profits in the long run, especially as additional states greenlight online lottery sales.
DraftKings Investors Might Be Experiencing Paralysis Due to Overthinking
As the US sports betting sector and the market for related stocks have expanded significantly in recent years, some investors have sought to extract stock-specific insights from the monthly data reports provided by the states that allow online sports betting.
Katz notes that month-to-month figures can be erratic, and placing excessive trust in those reports "is shortsighted and overlooks the long-term trend." The analyst notes that the domestic sports betting market is expanding faster than anticipated, suggesting greater profit potential than what current estimates indicate.
Katz recognized that increases in state-level gaming taxes are a short-term issue, though the risks are “exaggerated” and with an additional tax increase in Illinois now factored in, tax hikes from other states are expected to be minimal.
“That said, digital operators have historically been able to mitigate tax increases by tightening promotional strategies and revisiting market access channels,” adds Katz. “Our view remains that the company’s product evolution should position it to confirm its leadership role in the US well into market maturity.”
DraftKings Contains Catalysts
A recent theme impacting DraftKings and other sports betting stocks is that bettors are not as unfavorable as once believed. This was observed in the fourth quarter when DraftKings and its competitors reported earnings impacts from favorable NFL results for customers — a trend that continued into the first quarter during the Super Bowl and the mostly predictable NCAA Men’s Tournament.
That trend is expected to return to the average, and Katz anticipates DraftKings will report 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) of $850 million, with that amount rising to $1.5 billion the following year.
“We expect to see 90% free cash flow conversion next year,” concludes the analyst. “In our view, mean reversion on sports outcomes should return to the history of beats/raises, coupled with the clear path to cash generation, creating greater stability and downside protection for DKNG. In addition, the advent of in-play betting volumes in the US is underrepresented in estimates, which is bullish for the shares.”
