DraftKings’ remarkable 85% price recovery from its low point in 2022 still does not capture the full extent of the company’s potential.
Investing in a high-quality company is always a sound strategy. However, timing can significantly affect investment returns, particularly when companies are available at discounted prices due to temporary setbacks. For instance, DraftKings (DKNG -3.16%) presents an appealing opportunity as its stock is currently down 43% from its peak in 2021. Although the company is experiencing some turbulence, the long-term investment narrative remains robust and compelling for several reasons.
Understanding the Sustained Growth Trajectory of DraftKings
DraftKings has established itself as a leader in the fantasy sports arena and expanded into online sports betting following the Supreme Court’s decision to lift the nationwide ban in 2018. As various states have moved to legalize this lucrative segment of the gambling industry, DraftKings has strategically entered these markets. Currently, the platform is operational in 25 out of 38 states that permit some form of sports betting, including the District of Columbia. With more states advancing toward legalization, there is a significant incentive for state legislators to capitalize on the substantial tax revenues generated by this industry.
However, it’s important to note that the company has not consistently met expectations. For instance, last quarter, DraftKings reported a 39% revenue increase, reaching nearly $1.1 billion, which slightly missed analysts’ consensus estimate of $1.11 billion. Despite reporting an adjusted loss of $0.17 per share, which was better than the anticipated $0.18 loss, DraftKings’ monthly per-user revenue fell more than expected, dropping to $103 from $114 in the prior year. These figures indicate a need for the company to address its user monetization strategies.
Despite these challenges, DraftKings’ stock saw a surge following its third-quarter report, reflecting investor confidence in its sales growth and the reduction of losses. The adjusted loss per share has effectively halved year over year, and while revenue guidance for the upcoming year aligned with analysts’ expectations, it still signifies a projected top-line growth of approximately 30%. This resilience amidst challenges illustrates the company’s potential for recovery and growth.
Recognizing the Urgency: DraftKings’ Stock Is a Potential Bargain
Given the recent growth trends, one might wonder why DraftKings’ stock remains down 43% from its peak in 2021. The significant decline between the latter half of 2021 and early 2022 cannot solely be attributed to the bear market dynamics. The root cause of this volatility lies in timing and market conditions. DraftKings went public in April 2020 during a market environment clouded by the pandemic, which initially favored new opportunities. By that time, the company had begun gaining traction in the nascent sports wagering market. The pandemic, which kept many people at home, further contributed to its explosive growth during that period.
However, as anticipated, reality set in by the end of 2021. Investors began to realize that while DraftKings was a fast-growing company, it was still operating at a loss. A notable shift occurred in 2022, when several more states legalized online sports betting. This change helped clarify that reaching full market potential would take DraftKings several years in each state. Investors recognized that they may have oversold the stock in 2022, leading to the potential for recovery moving forward.
Image source: DraftKings 2023 Investor Day Presentation.
The ongoing business expansion, fueled by increasing user adoption, continues to support DraftKings’ stock price recovery since early 2023. The company benefits from remaining operational in states where its app has launched, leading to sustained growth in user engagement and revenue.
Exploring Future Growth: DraftKings Has Significant Potential
What does the future hold for DraftKings? The possibilities are extensive, suggesting that we are still far from reaching the limits of growth.
The American Gaming Association indicates that 38 states now permit some form of sports betting. While not all of these states allow it to be conducted online, and some regulations may not favor app-based platforms like DraftKings, the market for sports betting is expanding due to increased consumer awareness and ongoing legalization efforts.
Market research firm Straits Research forecasts a compound annual growth rate of over 11% for the global online sports wagering industry through 2032, supporting a similar outlook provided by Mordor Intelligence.
DraftKings is poised to capitalize on this growth trajectory. During its Investor Day presentation in November 2023, the company projected an impressive $7.1 billion in annual revenue by 2028, with approximately $2.1 billion expected to be converted to EBITDA. This growth forecast highlights the company’s strategic vision for the future.
Image source: DraftKings 2023 Investor Day Presentation.
For context, DraftKings estimates its revenue will approach $5 billion this year, with adjusted EBITDA anticipated around $260 million. Therefore, it’s essential to look beyond last quarter’s somewhat disappointing figures, recognize the broader trends, and understand why many investors are increasingly optimistic about DraftKings’ stock. Notably, despite its significant gains since early 2023, shares remain over 20% below analysts’ average price target of $50.80. Furthermore, a remarkable 75% of analysts covering this stock not only recommend it as a buy but classify it as a strong buy, indicating a favorable environment for initiating new investments.
