DraftKings: The drop seems to have subsided – it’s in the buy zone (NASDAQ: DKNG)

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Investment thesis

DraftKings Inc. (NASDAQ: DKNG) stock has been hammered over the past year. After trying to stage a reversal in September, the gap in its growth premium proved too wide for investors as they turned to higher quality stocks.

Nonetheless, the stock has been consolidating in a narrow range since January. Yet famed short seller Jim Chanos remains bearish on DKNG shares as he pointed out (edited): “Since appearing on CNBC a few months ago, DraftKings’ Adjusted EBITDA loss estimate for 2022 went from $500m to $900m. So things are getting worse there, not better.”

Not to be outdone, DraftKings CEO Jason Robins has also gone on the offensive against short sellers of DKNG stock. He pointed out that he would make those bearish traders/investors regret their decisions to short DKNG shares.

We understand the frustration of investors in DKNG shares. Since the company is still not profitable, growth investors appear to have bailed out in favor of “safer” names. Nevertheless, the business model of the company has not changed. Management also telegraphed a greater focus on customer acquisition costs (CAC), leading to more robust CAC efficiencies going forward.

With an eye on CQ4 ’23 Adjusted EBITDA profitability, we believe the current valuation reflects extreme pessimism in DKNG’s execution. Accordingly, we explain why DKNG stock is a buy at its current valuation.

DKNG Stock Key Indicators

DKNG stock NTM Revenue Trend

DKNG stock NTM Revenue Trend (TIKR)

DraftKings Revenue Year-over-Year Change Consensus Estimates %

DraftKings Revenue Year-over-Year Change Consensus Estimates % (TIKR)

The DraftKings stock valuation suffered a significant squeeze, as seen above. Its current NTM revenue of 3.3x is much lower than its listing (9.8x). Nonetheless, its profitable peers seen above have also traded at much lower valuations over the past three years.

As a result, investors digested the valuation of DKNG shares as they returned to profitable stocks. This demonstrated how pessimistic the market was and decided to grant DraftKings’ higher revenue growth estimates. Investors decided that DKNG no longer deserved its premium valuation as unprofitable growth stocks fell out of favor.

Where is DraftKings headed?

Therefore, it is essential for investors to consider whether DKNG stock still deserves to be stacked with a growth premium. Management first guided Adjusted EBITDA on its FQ4 earnings call. However, the Street was disappointed, as their estimates modeled a faster ramp to profitability from Adjusted EBITDA. As a result, the stock sold after earnings.

Despite this, DKNG stock has generally remained within its trading range. Additionally, we believe that recent “risky” sentiments following a potential market bottom in March may prompt investors to reassess DKNG stock going forward.

DraftKings held a highly anticipated investor/analyst conference in early March. Management detailed its financial models, explaining their trajectory to Adjusted EBITDA profitability by CQ4’23. Therefore, investors have a line of sight to DKNG’s profitability and a benchmark to gauge its performance. Additionally, DraftKings also highlighted the improved unit economy in its new states. Management pointed out that the speed of customer acquisition has improved significantly compared to New Jersey. Additionally, it also increased its estimated TAM from $67 billion to $80 billion, given its new cadence.

Additionally, its customer retention metrics continue to look robust. As a result, DraftKings stressed that it is increasingly confident that it will meet its profitability forecast. CFO Jason Park explained (edited):

What could accelerate our path to profitability? Remember Arizona, we acquire 3.5% of the population in the first 2 quarters compared to 1.3% for New Jersey. Could this create profitability at the state level more quickly? That could very well be the case unless the TAM is just significantly larger than we thought. And even then, it probably still is.

So we acquire more customers faster when a state launches these days than a state launched in 18, 19, and even 2020. (BofA Sports Betting and Online Gaming Conference)

Is DKNG stock a buy, sell or hold?

Consensus price targets for DKNG shares Vs. stock market performance

Consensus price targets for DKNG shares Vs. stock market performance (TIKR)

It is essential that investors consider that DraftKings is still not profitable. Moreover, it still heavily depends on the pace of state legalization, which would impact market sentiment and its revenue estimates. Therefore, investors are encouraged to pay attention to how the legalization momentum unfolds in 2022. exercise 24.

Nevertheless, we explained earlier that the growth premium for DKNG stock has already been digested. Furthermore, DKNG stock is also trading in line with its most conservative price targets (PT).

Thus, we think the risk/return profile looks attractive if you have a horizon of at least five years. As such, we reiterate our buy view on DKNG stock.

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