JPMorgan believes DraftKings stock still has significant growth potential ahead, despite already surging by 153% this year. Has the turnaround begun?

Yesterday (26 September) JPMorgan analyst Joseph Greff elevated the stock’s rating from ‘neutral’ to ‘overweight’ and raised the price target from $26 to $37.

Following this announcement, DraftKings shares saw a 2% uptick, pushing their value to around $28.

When an analyst upgrades a stock to ‘overweight’, it essentially signifies a recommendation for investors to consider either purchasing or holding more shares of the stock in their investment portfolios. 

Chasing the all-time high

The stock’s performance has been dynamic in recent times, reaching as high as $32 per share this month and boasting an impressive year-to-date surge of 153%. 

However, the stock is still a considerable distance away from its all-time high of nearly $72, which it reached during the Covid pandemic in March 2021.

In a communication to their clients, Greff noted that DraftKings had significantly underperformed the S&P 500 index since July, experiencing a decline of approximately 13%.

“We are capitalising on the recent sluggishness in the share price since late July, based on our belief in the attractiveness of the sector. 

“It offers enticing prospects for both same-store and new market growth, particularly in the context of an industry-wide improvement in controlling operating expenses. 

“This improvement is partly due to a decreasing proportion of revenues originating from newer markets, which carry substantial costs for user acquisition and upfront investments,” Greff said. 

JPMorgan emphasised that DraftKings possesses a “strong moat,” positioning it favourably against emerging players in the online gaming space such as ESPN Bet and Fanatics. 

Greff highlighted potential benefits, including increased market share driven by higher hold rates, improved customer loyalty, and declining customer acquisition costs as the company achieves national scale.

Path to profitability

In Q2 2023, DraftKings followed the lead of its US-focused counterparts in achieving EBITDA profitability. 

The company reported adjusted EBITDA of $73m for the quarter, a significant improvement from the adjusted EBITDA loss of $118.1m in the same period of 2022. 

DraftKings also saw a substantial increase in revenue during the second quarter, reaching $875m. This represents an impressive 87.8% year-on-year growth.

DraftKings attributes its revenue growth to various strategies, including customer retention efforts, efficient customer acquisition, continuous product innovation, and an enhanced focus on promotional activities.

Underlying predictions

Looking ahead, Greff’s predictions for the sports betting market are optimistic. He forecasts a market worth $23.2bn by 2030, with an 8% compound annual growth rate. 

In addition, Greff anticipates a $13.5bn market for iGaming.

Other analysts have also expressed positive sentiments about DraftKings. 

Needham analyst Bernie McTernan reiterated a Buy rating with a $44 price target, while JMP Securities analyst Jordan Bender reiterated a Market Outperform rating with a price target of $39. 

Needham believes that DraftKings maintains a leading position in the online gambling market, with competitors ramping up promotions to keep pace.

At nearly $13bn, DraftKings’ market value is competitive with major casino companies like Caesars Entertainment and MGM Resorts International, which have market caps of $9.9bn and $13bn, respectively.

Banks backing 888’s acquisition of William Hill’s non-US assets are preparing for losses on a £1bn bond and loan deal provided to help fund the purchase.

The acquisition, which closed on Friday (1 July), was funded with debt underwritten by banks led by JPMorgan and Morgan Stanley, which were scheduled to complete a sale of the debt to investors this week. 

However, according to the Financial Times, the banks are now struggling to offload the debt due to volatile market conditions.

JPMorgan announced on Friday that completion of the sale would be delayed until the middle of this week, citing a delay in finalising the documentation around the US dollar loan portion of the deal.

According to the FT however, bond and loan fund managers who were approached to buy the debt demonstrated only “tepid” demand, despite being offered double-digit yields.

The banks began marketing the deal at a yield of around 10%, according to the broadsheet, but will now need to price the debt even higher.

When banks cannot sell underwritten deals to investors, they are forced to offer the debt at a discount and therefore suffer losses.

In order to minimise the impact, the banks underwriting the deal have already agreed to hold £760m of 888’s debt on balance sheet rather than trying to sell it. 888 declined to comment on the situation.

On top of macroeconomic factors including a sharp rise in inflation, some suggest investor appetite for the deal has been curtailed by the UK government’s highly anticipated review of the Gambling Act, which is expected to be announced this week.

The contents of the review could weigh heavy on 888’s business, with proposed maximum stake limits for online casino of between £2 and £5, as well as curbs on promotional offers and free bets, threatening to have an impact on firm’s bottom line.

Shares in the newly combined 888 business were readmitted to the London Stock Exchange this morning following the completion of the William Hill deal on Friday.