Sports-betting firm DraftKings (NASDAQ:DKNG) popped about 7% higher today. A UBS analyst upgraded DKNG stock, despite it already more than doubling so far this year. Citing the company’s higher guidance for its first-quarter 2023 earnings disclosure, the expert anticipates additional momentum.
Specifically, Barron’s reported that Robin Farley upgraded DKNG stock to “buy” from “neutral” in a Monday report. As well, she raised her price target to $30 from $19. On the surface, the bumped-up forecast seems incredibly ambitious given DraftKings’ performance this year. Since the January opener, shares have gained roughly 133% of equity value.
Still, on a research note, Farley remarked that “further upside is possible given the faster ramp in new states.” As a result, the analyst increased her 2023 revenue estimate to $3.19 billion from $2.91 billion, mentioning DraftKings’ higher guidance in its Q1 disclosure. Moreover, she raised 2024 and 2025 revenue estimates to $3.94 billion and $4.81 billion, respectively.
As well, Farley anticipates revenue growing at a compound annual growth rate (CAGR) of more than 20% from 2023 to 2026. The latter year could “be the first full year of consistent” profitability based on EBITDA.
Growth will likely stem from DraftKings’ accelerated pace for entering new states, increased structural hold (percentages of bets that sportsbooks keep) and higher gross gaming revenue per player.
DKNG Stock Still Has Its Critics
Although DKNG stock appears incredibly compelling because of its stratospheric performance — both in the year so far and in the trailing 365 days — it’s not without concerns. At its peak, DKNG carried a weekly average price of nearly $72 (in March 2021). While hitting the forecasted $30 would be a significant achievement, it would still be well off DraftKings’ zenith.
Further, DKNG stock courts criticism. In particular, JPMorgan Chase analyst Joseph Greff in November 2022 lowered his view to “underweight” (the equivalent of sell) from “neutral.” At the time, DraftKings released its adjusted 2023 loss for EBITDA of between $475 million and $575 million during its Q3 call. However, Greff mentioned that this was worse than the loss of $350 million he forecasted.
For the analyst, this forecast rang alarm bells because sector rivals mentioned that the digital sports-betting segment will represent positive contributors moving forward. To be sure, in the Q1 2023 disclosure, DraftKings improved its EBITDA loss to $315 million. Still, Greff reiterated his “underweight” rating with a price target of $18.
Beyond analyst disagreements, DraftKings must strike a delicate balance with its clients. Obviously, if its clients become too successful on the platform, the company limits its profitability potential. However, if they’re woefully beaten down, DraftKings would have to scour for new customers. This dynamic could affect DKNG stock as society enters an economically vulnerable cycle.
Why It Matters
So far, TipRanks shows that Wall Street analysts peg DKNG stock a moderate buy. This assessment breaks down as 16 buys, eight holds and two sells. However, the average price target lands at $26.33, implying only about 2.5% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
