DraftKings represents a great buy opportunity after its share price decreased by 60% from its high in March 2021, according to analysts at JD Research.
DraftKings merged with white-label sportsbook provider SBTech and a special purpose acquisition company (SPAC) and launched on the Nasdaq in April 2020. The stock (DKNG) soared by as much as 18% on its trading debut, and it continued to climb until reaching a peak of $74.38 earlier this year.
However, it has since suffered a significant pullback amid concerns around customer acquisition costs and future profitability. Investment manager Jim Chanos, founder, and president of Kynikos Associates in New York City called the business model “flawed”, and it has been targeted by several short sellers this year.
DraftKings chief executive Jason Robins has come out swinging, engaging in an online spat with Chanos and offering a sharp rebuttal to short-seller reports, but the share price has decreased significantly. It opened at $27.85 today, down 7% over the past month and more than 36% since the start of 2021.
Momentum Swings in Favor of Growth Stocks
JD Research believes it now represents a strong long-term buy-and-hold opportunity. Writing in investment journal Seeking Alpha, the firm presented an investment thesis, whereby it noted that DKNG stock has been holding at its crucial support level even as the short-selling activity intensified in recent weeks.
“We have been observing the price action closely and believe that if the current level continues to hold, the stock can consolidate moving forward,” said the researchers. “It would then allow the market makers to accumulate quietly before forcing the shorts to cover and subsequently drive up the stock’s momentum.
“The momentum in the market also seems to have swung back in favor of growth stocks lately. Coupled with the recent insider purchases, its price action, and the high short-selling activity, we believe it’s time for long-term investors to consider adding exposure.”
Still in the Early Innings
The article notes that DraftKings is the number two online sportsbook in the country, behind only Flutter Entertainment’s FanDuel. It is also number two in iGaming – online casino gaming – behind BetMGM following DraftKings’ purchase of Golden Nugget Online Gaming.
“Therefore, investors in DraftKings are investing in a pure-play online leader which has demonstrated its ability to compete with players with profitable legacy gaming assets or even its land-based peers,” said JD Research. “DraftKings has presented its road to profitability clearly. It emphasized that it takes two to three years to achieve profitability upon entering a newly legalized state.
“DraftKings has also emphasized many times in its past conference calls that it achieved profitability in one of its most important states New Jersey in just two years upon entry. Notably, the company also added that it’s observing a similar profitability trajectory in other states. Therefore, DraftKings has made significant efforts to discuss investors’ most pressing concerns and never avoided addressing them.”
It adds that DraftKings is still in the “early innings” of its massive opportunity and that it will continue to grow revenue rapidly until 2026. The stock’s valuation has been battered recently, and it is now trading at the next 12 months enterprise value of 6/5x, compared to a mean average of 19.2x.
“We are confident that DraftKings’ management would leverage its leadership in online sports betting and iGaming as the legalization momentum carries on,” said JD Research. “Therefore, we encourage long-term investors to capitalize on its current weakness to add exposure to the online betting leader.”