DraftKings: Secular Industry Tailwinds Could Drive Further Upside

In the last year, digital sports entertainment and gaming company DraftKings (DKNG) has been in a steady uptrend. During this period, the stock has returned 241% and currently trades at $61.07 per share.

With positive company specific developments coupled with industry tailwinds, DraftKings stock remains attractive even after its massive rally. Let’s discuss the reasons for this bullish outlook.

Strong Industry Growth in the Coming Years

According to Barry Jonas of Truist Securities, the U.S. sports betting and iGaming market is likely to be worth $20 billion by FY2030. By the company’s own estimates, the global sportsbook total addressable market is worth $70 billion.

Back in FY2018, the American Gaming Association estimated that Americans illegally bet at least $150 billion annually on sports. Even if part of this market shifts to legal betting and sports, the opportunity is significant. Therefore, from an industry perspective, there is big potential for growth in the next decade.

To put things into perspective, DraftKings has guided for revenue in the range of $750 to $850 million for FY2021. Even if the company captures 10% of the global addressable market, the revenue potential is $7 billion.

It’s also worth noting that sports betting is being gradually legalized throughout the United States. On Jan. 24, the company launched DraftKings Sportsbook in Virginia. With growing reach, the company’s addressable market is increasing, which will translate to an acceleration in top-line and earnings growth. 

Overall, DraftKings is well positioned to benefit from secular industry tailwinds, likely resulting in a long-term stock uptrend.

Company Specific Bullish Triggers

DraftKings is scheduled to report Q4 2020 results on Feb. 26. It should be noted that the company has already guided for revenue of $550 million for FY2020. For the current year, the company’s revenue guidance is $800 million (mid-range). Therefore, the company expects 45% top-line growth on a year-on-year basis. Even beyond the current year, strong growth is likely to persist, reflecting one of the key stock upside triggers.

DraftKings is also looking at geographical expansion. The company is already entering new states in the U.S. as sports betting and iGaming is legalized. At the same time, international expansion is a key growth catalyst.

In October 2020, DraftKings partnered with Peermont Hotels to launch PalaceBet (a mobile and online sportsbook) in South Africa. Further, on Feb. 4, the company announced an agreement to expand their daily fantasy sports to Canada. This is just the beginning of the company’s international expansion and will ensure that healthy growth continues.

For Q3 2020, the company reported an adjusted EBITDA loss of $197 million. Although EBITDA level losses have increased on a year-on-year basis, that’s not a concern at an early growth stage.

What’s more, it’s worth noting that for Q3 2019, the company reported 621,000 average monthly unique payers (AMUP). For Q3 2020, AMUP was 1,021,000. Clearly, as paying users increase, the company will be positioned to generate robust EBITDA and cash flows. Once operating level profitability is achieved, the stock is likely to surge higher.

Wall Street’s Take

Looking to the analyst community, 12 Buys, 5 Holds and 1 Sell have been assigned in the last three months. So, DKNG has a Moderate Buy consensus rating. At $64.71, the average analyst price target suggests 6% upside potential. (See DraftKings stock analysis on TipRanks)

Concluding Thoughts

As of September 2020, the company reported cash and equivalents of $1.1 billion. Further, the company had zero debt outstanding. With ample financial flexibility, the company is positioned to push for aggressive growth.

The company’s CEO did mention during the Q3 2020 conference call that DraftKings is exploring opportunistic and accretive M&A. That’s another potential trigger for revenue and earnings acceleration.

Overall, DraftKings is positioned for multi-year growth. It’s very likely that the stock will remain in an uptrend, and thus, fresh exposure can be considered at current levels.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.