Is it too late to buy DraftKings (NASDAQ:DKNG) stock? Boosted by election day results, along with a strong quarterly earnings release, it’s no surprise this first mover in the sports betting industry has rallied more than 33% since Nov 1. But, although shares are still below their all-time highs, some investors are concerned shares have rallied too far, too fast.
That is to say, with all the excitement over the sportsbook legalization megatrend, investors have bid this up to sky-high valuation levels. Sure, with shares trading for around 22.2 times its projected 2021 sales, it does look pricey.
Yet, there’s plenty of near-term runway left with DraftKings stock. How so? With its recent earnings beat, updated guidance numbers, and the potential for its total addressable market to be larger than expected, there’s much on its side to send it higher in the near-term.
Sure, the slightest hiccup could move this high-risk stock in the wrong direction. But, even with many risks (more below) on the table, a small position may be warranted at today’s prices.
DKNG Stock and The Recent Guidance Boost
As seen from its Nov 13 earnings release, it’s clear DraftKings continues to knock it out of the park. As legal sports betting expands across the United States, the company’s top line continues to climb. Sales for the quarter were $133 million, up 98% from the prior year’s quarter.
The “Return of Sports” following the novel coronavirus lockdowns may have been a driving factor. But, don’t consider the company’s growth as of late to be an one-and-done “pandemic tailwind.” In addition to outperforming last quarter’s expectations, the company has boosted its full-year guidance for both this year, and announced impressive projections for the next.
2020 revenues are now projected to be between $540 million to $560 million. For comparison, prior 2020 guidance called for revenues between $500 million and $540 million.
For 2021, DraftKings estimates the top line could climb 45%, coming in at between $750 million and $850 million. So, with the company’s prospects continuing to improve, why are some still worried?
Granted, those bearish on shares today have some solid reasons to back up their case. But, while I agree investor enthusiasm could turn on a dime, there may be enough at play to send shares back to, or above, their all-time highs (around $64 per share).
Many Concerns, But Shares Could Still Head Higher
Valuation concerns aren’t the only reason why some are bearish about this stock at today’s prices. In his Nov 16 article on DKNG stock, InvestorPlace’s Chris Markoch listed several factors that look concerning.
A major one is the company’s customer acquisition costs. DraftKing’s sales and marketing expenses in the recent quarter were 1.5x its revenue! Given it’s competing with rivals like Flutter Entertainment’s (OTCMKTS:PDYPY) FanDuel, Penn National’s (NASDAQ:PENN) Barstool Sports, and others, this heavy spending is par for the course. However, I agree it’s a risk this costly build-up of its customer base continues longer than anticipated.
Another concern of Markoch’s is the recent surge in Covid-19 cases which puts sports on hiatus once again. I agree this is a major risk. Even if a vaccine is just around the corner, we could see another hiatus for NBA and NCAA basketball. This would severely impact DraftKings’ performance, as basketball makes up the bulk of the winter sports betting menu.
Yes, risks notwithstanding, there’s a major factor that could help keep shares rallying in the near-term. What am I talking about? The prospect of the company’s long-term potential exceeding projections.
That’s the view of Loop Capital Markets’ Daniel Adam. The analyst, who recently initiated coverage on DKNG stock, assigned it a “buy” rating, and a stunning $100 per share price target. What’s the rationale behind this bold call?
Adam sees sports betting and iGaming (online casinos) eventually becoming a $30 billion per year industry. This projection vastly exceeds the current consensus of around $20 billion. Granted, this is just one analyst’s opinion. But, if others boost their estimates, it may be another factor that helps sustain enthusiasm. Even as shares look “priced for perfection,” I wouldn’t bet against it.
A Screaming Buy on a Pullback, But Still Solid at Today’s Prices
Obviously, DraftKings is more of a screaming buy if shares take a hit from here. But, even at today’s premium valuation, there’s still room for the stock to continue climbing back towards its all-time highs.
Many are bearish about this coming winter, and the potential for a second season of coronavirus-related lockdowns. But, with a vaccine on the horizon, things may turn out better than expected. With pandemic worries partially holding shares down, more indication a widely-available vaccine is coming will minimize this factor.
Coupled with the bullish factors mentioned above, and there’s enough in the tank to boost DKNG stock further from here. Don’t bet the ranch, but consider shares a cautious buy at today’s prices.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.