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DraftKings Stock May Finally Be Worth Betting On
Stock Analysis & Ideas

DraftKings Stock May Finally Be Worth Betting On

DraftKings (DKNG) stock has been under intensifying selling pressure over the past few months. Now down close to 60% from its Spring 2021 peak at around $72, shares are a far cry away from the consensus price target of $62.06. Such a price target represents a gain of over 100% from current levels.

Undoubtedly, analysts may find themselves lowering the bar on their price targets after such a vicious decline. Still, with more Buy than Hold or Sell ratings, there is a chance that the sports-gaming giant may be an appealing dip-buy for growth investors who still subscribe to the original growth thesis.

Short-Seller Jim Chanos Sets Sights on DraftKings Stock

Despite the vicious plunge in the stock, billionaire investor Jim Chanos sounds as confident as ever with his bet against the DraftKings. Indeed, the man outlined a handful of reasons why shares of DraftKings had further to fall. Most notably, Chanos remarked that the company’s spending on marketing was “insane.”

Indeed, considerable marketing spending has pushed profitability prospects further away. Still, the DraftKings brand is seen as a go-to player across numerous leagues. While switching costs for sports entertainment and digital gaming are quite low, I do think excessive marketing spend is the right way to go, as the firm builds its brand in an industry that’s still in its early innings. Coca-Cola (KO) is another firm with a hefty marketing budget. For Coke, the spending has been more than worthwhile over the years, allowing the firm to boast one of the widest moats out there despite operating in a fairly commoditized beverage industry.

Still, it’s quite a step to say DraftKings can spend its way to a comparable moat through its brand. Undoubtedly, sports gamers will be after innovation and a superior value proposition. With a competitive environment that could grow to become much more crowded over the coming years, DraftKings needs to differentiate itself.

For now, its powerful, well-known brand gives it a head-start. Whether it will be worthwhile at the end of the day remains to be seen. Regardless, I do think most of Chanos’ concerns have already been baked into the stock here. As such, I remain bullish on DraftKings stock, with shares trading around 11 times sales.

Could it be that Chanos is talking up his book? Or, does DraftKings have a serious marketing spend problem? Indeed, it’s tough to gauge how the sports-gaming giant will fair if it winds down its marketing spend. For now, it remains the king of its niche. (See Analysts’ Top Stocks on TipRanks)

DraftKings’ Longer-Term Growth Prospects Still Solid Despite Recent Pressure

With rivals hungry for a growing slice of the digital sports-betting market, though, the company needs more than just marketing to retain the crown. Fortunately, the firm has deep enough pockets to scoop up potential threats moving forward. Given DraftKings’ relatively small market cap ($12.5 billion), such M&A is unlikely to draw concern from regulators who mostly have their sights set on the tech titan with market caps near or north of the $1 trillion mark.

Fortunately, DraftKings’ throne looks secure for now. As jurisdictions across the U.S. ease digital gaming restrictions, DraftKings will likely win over the lion’s share of the business. While the firm’s marketing budget may be at elevated levels, it doesn’t appear to be compromising on the technology front.

In fact, greater marketing spending could be directly correlated with the effectiveness of the firm’s data analytics algorithms. Only time will tell if DraftKings will wind down its marketing budget. Regardless, I think aggressive marketing is the way to go for the time being. As the industry matures and sports betting becomes commonplace, Draft Kings has potentially unfathomably growth potential. For that reason, I wouldn’t dare bet against the stock, especially after a decline of near 60%.

Wall Street’s Take

Turning to Wall Street, DKNG stock comes in as a Moderate Buy. Out of 18 analyst ratings, there are 11 Buys, six Holds, and one Sell rating.

The average Draft Kings price target is $62.06, implying 103.4% upside potential. Analyst price targets range from a low of $34.00 per share to a high of $105.00 per share.

The Bottom Line on DraftKings Stock

Will DraftKings continue taking a hit as the market turns against the most expensive growth stocks? I’d say it’s more than likely, but for true believers in DraftKings dominance, the dip seems more like an opportunity to buy rather than cut losses.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >

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