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DraftKings Lands Buy Rating in New Coverage by Goldman Sachs

Shares of DraftKings (NASDAQ: DKNG) gained 2.74% on a mixed day for gaming stocks after Goldman Sachs issued a bullish call on the online sportsbook operator.

DraftKings
DraftKings CEO Jason Robins. Goldman Sachs initiated coverage of the stock with a “buy” rating. (Image: Bloomberg)

In a note to clients today, analyst Ben Miller tagged DraftKings with a “buy” rating and a $60 price target, implying upside of 37% from the April 15 close. He expects DraftKings, which delivers first-quarter results on May 3, to continue delivering substantial top-line growth.

(We) expect DraftKings to compound revenue at 20%+ as it continues to benefit from healthy growth in existing states, as well as future state legalizations across online sports betting & iGaming,” wrote Miller.

Recent data indicate DraftKings is adding online sports wagering market share in large states, including Michigan and Pennsylvania. The company also possesses one of the most valuable brands in the industry and its mobile application is among bettors’ favorites due to the operator’s investments in technology. That presents DraftKings with significant advantages over some smaller rivals that are struggling to add market share.

DraftKings Stock Not as Expensive as Believed

While shares of DraftKings are higher by 65% over the past nine months and 134.55% over the past year, Miller argues the stock is actually trading at attractive multiples relative to industry and its own historical averages.

“While the stock is up ~65% over the past 9 months, DKNG is trading at a growth adjusted revenue multiple of 0.15x (vs. its historical average of 0.19x and peers currently trading at 0.17x), which is down ~20% over the same time period,” wrote the analyst.

As is often the case with emerging growth stocks following scorching runs to the upside, investors can place added emphasis on valuation. Conversely, valuation alone isn’t a reason to buy or sell a stock and if DraftKings keep with its tradition of boosting earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance, it could be seen as increasingly undervalued based on the math presented above.

“We see upside to Street revenue as estimates appear to be pricing in conservatism around some combination of existing state gross gaming revenue (GGR) as % of PCE, new state launches across online sports betting (OSB) & iGaming &/or DraftKings’ market share position,” added Miller.

Risks to DraftKings Bull Thesis

With the stock on a scintillating pace to start 2024, it is clear DraftKings is proving immune to at least negative scenario. That being disappointment on the new state legalization front. With Georgia’s 2024 legislative session over, it appears no states of note will add sports betting or iGaming this year.

Goldman’s Miller noted that risks to the DraftKings upside thesis include sluggishness on the new state launch front, slack growth in the operator’s vintage states, and the possibility of eroding market share. However, there’s currently little evidence indicating DraftKings is losing market share.

On the legislative front, it’s possible that something changes for the better in Missouri where a significant majority of voters approve of adding mobile sports wagering, but that appears to be a heavy lift at the moment.

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