DraftKings Inc. (DKNG), based in Boston, has benefited from growth opportunities at the intersection of digital sports entertainment and gaming, observes analyst John Staszak of Argus Research, a leading independent Wall Street research firm.
The digital sports entertainment and gaming company provides users with daily sports, sports betting, and iGaming opportunities. It is also involved in the design and development of sports betting and casino gaming software. The company has approximately 900 employees.
DraftKings is the leader in daily fantasy sports, with approximately 60% of the U.S. market by revenue, according to industry sources.
The online gaming industry is in the early stages of growth, with only 3% of gross gaming revenue in the U.S. generated online, compared to 45% in more mature online gaming markets such as the U.K.
Currently, states accounting for 36% of the U.S. population have legalized gambling, while states accounting for 24% of the population allow online gambling. As more states loosen restrictions, we expect DraftKings to benefit from its market leadership.
Investors have recognized the company’s potential, and the shares have outperformed since the company went public in April 2020. Technical patterns are positive as well.
But there are risks to owning DKNG shares. Consumer spending patterns may change depending on the course of the COVID-19 virus, as well as other factors such as state regulations.
Though we don’t expect DraftKings to post a profit this year or next, we do look for profitability in 2022 and solid growth over the remainder of the decade as the company benefits from economies of scale.
Our 12-month target price is $65. We caution, however, that any unexpected revenue or EPS shortfalls, or unfavorable regulatory decisions, could result in a sharp selloff. As such, we view DKNG as appropriate only for risk-tolerant investors as part of a diversified portfolio.
