DraftKings (NASDAQ:DKNG) released its second-quarter earnings on Aug. 6 and it was a great surprise. Analysts had been expecting between $242 million and $247 million in sales, as I mentioned in my article last week. But when the actual report came, DraftKings reported a much higher number than analysts forecast. As a result, DKNG stock is now worth a good deal more, based on analysts’ expectations.
Sales came in at $298 million for the quarter. This represents 22% higher sales compared to the midpoint of prior analyst expectations.
This is very unusual. Typically when there is a surprise over analyst expectations, it might be in the range of 3% to 5%, maybe 10% at most. But a 22% higher number is truly amazing. It shows, at the core, that people are simply gambling much more than anyone could have foreseen.
Moreover, the company also said that it had grown the number of monthly unique payers by 281% and average revenue per monthly unique payer by 26%. In other words, fundamental growth was very strong.
Where This Leaves DraftKings Stock
This implies that the underlying value of DKNG stock is probably much higher than I previously thought. For example, DraftKings also announced that its guidance for the year was now much higher. It indicated that sales for 2021 will be in the range of $1.21 billion to $1.29 billion.
DKNG stock has now risen from a recent closing low on July 16 of $43.79 to $51.98 as of the close on Aug. 10, or 18.7% higher since the Q2 earnings have come out. The market realizes that something has changed here. People are really gravitating to DraftKings to do their online gambling.
For example, analysts surveyed by Seeking Alpha believe that the 2021 revenue will be the high end of the company’s range. In addition, sales by 2022 will reach $1.72 billion and up to $4 billion by 2025. In my previous article, I wrote that analysts’ forecasts were for $3.57 billion by 2025.
Now assuming a 50% EBITDA (earnings before interest, taxes, depreciation, and amortization) this implies that EBITDA will reach $2 billion in 2025. At 15 times enterprise value (EV) to EBITDA, the company is worth $30 billion in EV. After adding back $2.646 billion in cash, as of June 30, the total equity market value is $32.646 billion.
This is 55.7% over the $20.963 billion market value as of Aug. 10, as calculated by Yahoo! Finance, which tends to have the most accurate market value. In other words, my price target for DKNG stock is $80.93. That is higher than my previous target price of $71.66.
Where This Leaves DKNG Stock
As I explained in my last article, I usually discount future earnings or EBITDA numbers like this to their present value. However, in this case, I don’t think it is necessary.
The reason is that the sports gambling industry will grow both significantly and consistently over the next 10 years. This implies that there is no need to discount to the present since growth will be so strong. I suspect that analysts will be consistently underestimating this growth going forward, just like they did this quarter.
In effect, the market is willing to value this stock based on its EBITDA over four years in the future, just like it does for other fast-growing industries like electric vehicles.
And this does not even include any revenue from the company’s new initiatives such as its NFT (non-fungible tokens) in its collaboration with a company called Autograph.
What to Do With DKNG Stock
Most investors don’t realize the effect of the sweeping changes in gambling laws and regulations across the U.S. For example, Morgan Stanley analyst Thomas Allen says the sports betting industry’s revenues will reach $15 billion by 2025, up from $3 billion in 2020.
This might be a good time for value investors who are willing to pay a reasonable price to take a look at DKNG stock. My analysis shows that it is worth at least 56% more at $80.93 per share.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
