What a stunning year DraftKings (NASDAQ:DKNG) has had, rising an astonishing 235% year-to-date compared to the S&P 500, which has gained 17.5% for the year.
Earlier this month, management reported impressive earnings, triggering the stock to soar from below $30 per share to close to $40 per share within a two week period.
The momentum is so great behind DKNG share price now, the question arises how high will DraftKings stock go?
DraftKings Is Much More Than a Betting Platform
DraftKings is primarily known as a fun platform to speculate on sporting events but what few investors know is the extraordinary technology that underpins it. Management has been masterful at building out a world-class user experience that employs advanced data analytics to provide a competitive edge with a view to enhancing long-term returns.
Building a cutting-edge product is one thing and distributing it broadly to acquire users is quite another. Where DraftKings has excelled is in forging strategic alliances with major sports leagues, media companies, and even influencers.
Its aggressive marketing strategies and promotional campaigns have proven costly to the marketing line item on the P&L, but the top brass clearly has a handle on key performance indicators, such as customer lifetime value. In spite of high customer acquisition costs near-term, it’s clear they have confidence that the numbers will back out long-term.
Beyond its prowess in marketing and partnerships, DraftKings has built a legal team that most sports betting firms would envy. As one of the early pioneers in the sports betting world, DraftKings has also done a stellar job navigating the complex regulatory landscape. When new markets open up as a result of the legalization of sports betting, DraftKings can move quickly to grab market share.
From a strategic perspective, investors can take comfort also from the fact that DraftKings is diversifying into various other gaming segments like online casino games in order lower risks associated with total reliance on sports.
Combine cutting-edge technology, world-class marketing, noteworthy partnerships and a winning strategy and it’s hard to bet against DraftKings, so that’s the ceiling for DKNG share price?
How High Will DraftKings Stock Go?
With management bullish on the prospects for guidance in the next five years, the odds are consensus estimates will only increase in the coming weeks but for now analysts have a line in the sand under $40 per share.
So precisely, how high will DraftKings stock go? According to the 31 analysts covering DraftKings, the stock could rise as high as $38.03 per share.
The highest estimate for DKNG share price is $50 per share while the lowest projection is $23 per share.
A 5-year discounted cash flow forecast analysis is quite a bit more optimistic than Street estimates and puts fair value at $44 per share.
The company has a history recently of increasing its earnings per share figures, and if that trend continues, expect $44 to be reached and perhaps eclipsed.
DraftKings Top Line Growth Is Extraordinary
The growth story of DraftKings is so impressive that it can barely be fathomed. Back in Q4 2020, revenue growth year-over-year spiked by 146.1%. But that was a strange time with lockdowns, so perhaps the top line growth slowed down as happened so many other high potential stocks?
Yes, the percentages declined from triple-digits but make no mistake about it, DraftKings has continued to power higher on the top line quarter after quarter. In the most recent report, it announced revenues up 57.4% on an annualized basis. The juggernaut simply keeps on trucking so from $322 million in revenues 3 years ago, the current quarterly figure is $790 million.
Of course it’s a rare unicorn that has no drawbacks on the financial statements and DraftKings is no exception. Where it falls short of a perfect score is obviously not on the top line but rather on the bottom line. Every single quarter over the past twelve, earnings per share have been negative.
The cost of investing so heavily in marketing via partnerships and influencers has been negative operating income, and poor profitability. That in turn has affected the balance sheet cash reserves which have fallen over the past three years from $1.8 billion to $1.1 billion. Long-term has stayed about steady, climbing marginally from $1.24 billion to $1.25 billion.
On the cash flow statement, what it all has amounted to is a bobbing and weaving of levered free cash flows that are up and down like a yo-yo.
So, while the financial statements are impressive on arguably the most important number, revenues, they lack polish elsewhere. What does that all mean for the merits of buying the stock?
Is DraftKings Stock a Buy?
The run-up in DraftKings stock this year has been nothing short of spectacular. Across most any time frame, the share price looks phenomenal, 235% for the year, 57% over the past 6 months, and 24% in the last month alone.
Those kinds of leaps higher have naturally meant that the cushion room for investors has significantly reduced, or in other words, the share price proximity to fair value is much smaller.
For investors, the promise of greater revenues for the foreseeable future is high but equally the likelihood of earnings per share turning positive near-term is somewhat in jeopardy.
If you’re betting on a stock for the long-term, DraftKings fits the bill as further legalization of sports betting opens up new markets in new states. Its expansion beyond that core competency should mitigate risk and diversify revenues too.
Given that management has such a good handle on acquisition costs and customer lifetime value, the future appears to be bright but expect the ride to be choppy, and full of extremes, both highs and lows as expectations are met and missed.
DraftKings isn’t a stock for the faint of heart, but it should ultimately reward committed and patient shareholders.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.