DraftKings (NASDAQ:DKNG) is set to release its second quarter earnings before the market opens on Friday, Aug. 6. I suspect the results will be better than most people expect. With fewer pandemic restrictions, people are likely gambling more at casinos. Furthermore, this past quarter just had some huge sports events. I think the outlook for DKNG stock and the sports betting industry is bright going forward.
I still believe DKNG stock is worth around $73 per share, as I explained in my last article on June 9. This represents an upside of 51% from its Aug. 3 price of $48.39.
So far this year, the stock is up slightly from $44.86, its closing price on Dec. 31 2020. Given the outlook for the stock and the sports betting industry, it seems like there is a good chance DKNG stock will move higher.
What to Expect for DraftKings
As it stands, analysts followed by Seeking Alpha expect DraftKings to show revenue of $247.22 million. Meanwhile, analysts tracked by Yahoo! Finance expect revenue of $242.41 million. Compare this to $70.9 million in revenue last year, or more importantly $312.3 million in Q1 (and $322 million in Q4 2020). It seems the company’s revenue is likely to continue to grow.
That will eventually lead to a situation where the company can make money on a net income basis. DraftKings had an adjusted EBITDA loss of $139.3 million on Q1 revenues of $312.7 million. EBITDA is a form of cash flow called earnings before interest, taxes, depreciation and amortization.
But this included marketing expenses of $228.7 million, or 73.2% of sales. These expenses are likely to fall. As a result, DraftKings is likely to make 50% EBITDA margins within the next 5 years.
Analysts now expect $3.57 billion in sales by 2025, according to Seeking Alpha. Assuming 50% margins, the company will see EBITDA of $1.785 billion.
At 15 times enterprise value (EV) to EBITDA, this gives it an EV of $26.775 billion. After adding back $2 billion in cash it will have by then, DraftKings’ equity market value is $28.775 billion. That is 48.1% over today’s market value of $19.436 billion.
As a result, this implies that DKNG stock is worth $71.66 per share, or 48.1% more than its Aug. 3 price of $48.39.
Where This Leaves DKNG Stock
Normally, when I use a four-year forward forecast to value a stock, I discount its revenue and EBITDA profits to the present. That means I will usually use an interest rate to deflate or discount future earnings. It reduces the future number by the dollar interest earned over that period that could otherwise be earned by an investor.
However, as I argued in my last article on DKNG stock, I don’t think that is necessary here. The reason is that I believe growth in the sports gambling industry will be significant and consistent over the next 10 years.
For example, Morgan Stanley analyst Thomas Allen believes that the sports betting industry’s revenues will reach $15 billion by 2025, up from $3 billion in 2020. But he is likely to same the same thing in four years as well.
So, just as the market values Tesla (NASDAQ:TSLA) on a five- to 10-year forward basis, DKNG stock’s normal is a four-year forward basis. This is why I think it is appropriate to use a 2025 revenue and EBITDA earnings estimate for DKNG stock.
Look for DKNG stock to rise 48% to $71.66 per share some time over the next two years.
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.
