Sports-gambling company Draft Kings (NASDAQ:DKNG) has been on a tear since its initial public offering on April 24. DraftKings stock has gained 110% since its IPO and is expected soar even higher based on analyst estimates.
The company is a frontrunner in the iGaming and fantasy sports betting and continues to pursue strong growth opportunities. Despite losing its steam due to the novel coronavirus and the suspension of sporting activities, it is effectively branched out into betting on e-sporting events, simulated NASCAR races, and its iGaming platform.
I feel that as countries begin to emerge from the pandemic and professional sports resume, DraftKings stock will be on track to achieve a $75 stock price. Its highest price so far has been $43.70 on June 1, which is roughly 16% higher than its current stock price. A massive upside exists with DraftKings and is one of the best investments you’ll find in what has been one of the most torrid investment years in recent memory.
Customer Acquisition and DraftKings Stock
DraftKings had a weaker-than-expected first quarter, posting a net loss of $68.7 million or a net loss of 18 cents per share.
Consensus estimates projected a slightly lower net loss of 15 cents per share. Revenues which were expected to grow by 60% pre-Covid 19, grew only 30% year-over-year.
The company has demonstrated strong growth in its customer acquisition as its customers grew by roughly 100,000 in the past year, with an 11% increase in average revenues per customer. Moreover, the inclusion of e-sport competitions and other non-traditional events in betting has helped the company in diversifying its revenue streams.
The pandemic has pushed several companies into bankruptcies, but DraftKings has been successful in limiting its impact with its cash holdings totaling $450 million. It has enough liquidity to sustain its operations and cover its $15-20 million cash burn.
DraftKings continues to invest heavily in advertising and brand awareness, which has greatly impacted its profitability. Restrictions on betting in certain states and the lack of access have made its job more difficult compelling the management to invest massive amounts on marketing. However, marketing efficiency is likely to improve once there is more access to sports betting services.
Upside Potential
The iGaming and the sports betting industry is set to boom in the US, as several states have moved to legalize sports betting in recent years. Investment firm Morgan Stanley predicts that the online sports betting market in the U.S. will generate roughly $7 billion in revenue by 2025, which is 740% higher than the $833 million it generated last year. Analysts believe that if 65% of states legalize sports betting, then it would result in a $21 billion implied U.S. Market and an $18 billion market at maturity.
DraftKings currently has a 20% market share in the U.S. online sports betting industry and 10%-20% in the iGaming industry. These numbers put the company in a strong position to capitalize on the industry’s growth and expand on its market share through effective networking, marketing, and operational efficiencies.
DraftKings thirst for constant innovation is what sets it apart from its competition. For example, CEO Jason Robbins recently talked about how the company is focusing its efforts on real-time in-game betting on its platform.
Robbins stated that “in-game is about 75% of the revenues at sportsbooks” in the UK. These “prop bets” have gained massive popularity off-late and could be the next big thing in the U.S. market.
Moreover, the company has also spread its tentacles in the e-sports market. The global esports betting market is expected to top $17.2 billion in revenues by the conclusion of 2020, according to Wholesale Investor. Therefore, the market has tremendous upside potential, which could become a major revenue generator for online sports betting companies.
The majority of investment firms are bullish on DraftKings stock, but what’s more intriguing is its price target. There is a considerable difference between its high estimate at $50 and its low estimate at $25.
According to its mean estimate of $43.9, the stock is currently undervalued by roughly 19%. However, I expect the company to eclipse that target within the next few months, with the return of professional sports
Bottom Line on DraftKings stock
Overall, DraftKings keenness towards innovation and strong growth in customer acquisition makes it one of the most investable companies in the market. With professional sports returning to tv screens within the next few months, expect revenues to jump by a significant margin.
The company’s diversified revenue streams have helped the company in effectively weathering the storm and set itself up for a much stronger showing in the latter half of the year. Therefore, DraftKings stock is a strong buy for me.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.
