DraftKings begins to bounce back as Morgan Stanley makes case for 60% stock rebound
The share price of US operator DraftKings soared by more than 14% in early trading on Nasdaq after Morgan Stanley said the stock should not be ignored at current levels.
The investment bank upgraded DraftKings to Overweight from Equalweight after the stock plummeted more than 75% from its 52-week high to yesterday’s close of $19.32 per share.
The stock has been in freefall for nearly five months now. Investors have jumped off due to concerns over the company’s long-term profitability in the US, which has coincided with a wider downturn of digital entertainment stocks that mostly flourished during the peak of the Covid-19 pandemic.
“While we and the market have been focused on near to medium-term profit concerns, we believe at the current price, one should not ignore that DKNG is a leading market share player in what will be a very large profitable market,” said Morgan Stanley in a note.
The bank said DraftKings, in its view, was closer to a $31 per share business on predicted double-digit EBITDA from 2025 onwards, implying at least a 60% upside over time.
As justification for the upgrade, Morgan Stanley said the top five operators in every state to release market share data have a combined share of at least 82%. DraftKings is one of those leaders.
“Though there is a lot negative written about the levels of marketing and promotional spending, this has driven a very concentrated market that only players of scale can really compete in,” said the research team. “The importance of technology and the need to enter into many states, sometimes at relatively similar times, furthers the benefits of scale.”
Morgan Stanley said a deep dive of state-by-state marketing and profitability suggested DraftKings losses should be lower in 2023 than in 2022 and 2021, which could be a major catalyst for the share price, although that is still one year away at the very least.
In November, DraftKings reported a Q3 annual revenue rise of 60.2% to $212.8m. Despite the growth, the business recorded a net loss of $545m after spending more than $300m on sales and marketing amid the ongoing war to acquire customers in the US states to have legalised online sports betting.
Noting potential headwinds, Morgan Stanley said DraftKings would probably need to raise capital again before 2024 and will likely face stiffer competition in the US in the future from big-name brands like ESPN and Fanatics that could still enter the sports betting space.
Despite this, the bank is still predicting estimated full-year 2022 revenue of $2.1bn for DraftKings, which is above both consensus and internal guidance at this point.
Finally, Morgan Stanley said it was confident DraftKings losses would be lower in 2023 than in 2022 based on its internal prediction model.
“Combined with our new market forecasts, revenue goes up but margins come down, resulting in our price target remaining unchanged at $31,” the note concluded.