DraftKings (NASDAQ:DKNG) has a bevy of credible catalysts, but there are also reasons for investors to approach the sportsbook operator with caution. I write this as an owner of DraftKings stock.
While I’m reluctant to say there’s bad news afoot with this name – there’s probably not – it pays not to be overly hyped about the near-term prospects, either.
The Boston-based company delivered third-quarter results, topping Wall Street forecasts on both the top and bottom lines. The daily fantasy sports (DFS) provider reported a loss of 57 cents a share on revenue of $133 million while analysts were expecting a loss of 61 cents on turnover of $131.7 million.
More importantly, DraftKings issued 2020 revenue guidance of $540 million to $560 million while forecasting $750 million to $850 million for next year. The sell-side was expecting $526.8 million for this year and $775.9 million in 2021.
Beats and guides higher are usually good things, but there’s some rain on the DraftKings parade for the third quarter. For starters, this quarter won’t be comparable in 2021 because this year, owing to the novel coronavirus pandemic, the NBA, one of the most bet sports in the U.S., was included.
From a betting perspective, unless the bettor in question likes baseball, July and August are usually slow months until college football ramps up in late August. Said another way, the pandemic forcing the NBA to adjust its season likely artificially inflated DraftKings’ July through September results.
DraftKings Stock: Big Costs, Great Expectations
For investors scrutinizing Draftkings – and they should – the issues to nitpick are easy to spot and each one is related. The company isn’t profitable and it won’t be until 2022 or 2023 and it grapples with high marketing costs.
In the sports betting industry, marketing costs aren’t limited to advertising, though DraftKings and rival FanDuel are quite liberal on that front. There’s customer acquisition costs, including sign-up bonuses for new players.
After awhile, throwing hundreds of dollars (depending on deposit size) at each fresh client gets expensive and the endeavor crimps the bottom line. Still, some analysts are encouraged by what they see when it comes to DraftKings’ ability to manage those costs.
Needham analyst Brad Erickson (in a note out earlier this week) said that although customer acquisition costs and profitability are a concern, he was confident the company was managing its return on investment while going after greater market share.
The good news is DraftKings’ profligate spending is bearing fruit in other ways. It’s the second-largest online sportsbook operator in the U.S. behind FanDuel. Plus, in the nine states were it offers online and mobile wagering, DraftKings usually ranks first or second in terms of market share.
Additionally, the company is proving adept at customer retention. Pennsylvania, one of the largest sports betting markets in the country, paints that picture. Even with the recent launch Barstool Sportsbook by Penn National Gaming (NASDAQ:PENN), DraftKings’ position in the Keystone State wasn’t affected.
Encouraging Outlook, but Expect Bumps
There are good reasons for the enthusiasm surrounding DraftKings. Loop Capital tagged the stock with a $100 price target on Nov. 17. That’s about 30% above the prior high price forecast and more than double where the shares currently reside.
At the fundamental level, it’s clear more states are open to sports betting. Election Day 2020 proves as much and DraftKings is likely to benefit from the arrival of regulated sports wagering in Louisiana and Maryland.
The political climate is favorable on other levels. Notably, recent additions to the sports betting fray are realizing the benefits of partnering with gaming companies and not saddling state lotteries with managing sports wagering.
Second, there’s significant opportunity afoot for DraftKings’ internet casino business as more states hunt down additional revenue sources. It won’t be a straight line to $100, but DraftKings can appreciate significantly from current levels.
On the date of publication, Todd Shriber owns shares of DKGN and PENN.
Todd Shriber has been an InvestorPlace contributor since 2014.
