MGM - DraftKings Strikes Back With A Vengeance

2023-05-06 02:55:14 ET

Summary

• DraftKings stock has recovered over 130% from its early January 2023 lows, stunning bearish investors and short-sellers.
• Management stressed at its recent earnings update that it's on track for adjusted EBITDA profitability breakeven in the second quarter, ahead of Wall Street estimates.
• Investors who demonstrated conviction over its highly pessimistic levels in 2022 have been duly rewarded.
• With DKNG recording a new 52-week high this week, should investors jump on board now?

DraftKings Inc. (DKNG) investors cheered the leading online sports betting or OSB and iGaming company as it reported its FQ1'23 earnings release . In addition, the company raised guidance for FY23, as it now sees possible breakeven in adjusted EBITDA (approximately) by the second quarter of FY23.

DKNG surged more than 15% to close yesterday's trading session, rewarding courageous dip buyers who anticipated its peak pessimism through early January 2023.

We stressed in May 2022 that the " marauding " in DKNG is over (that proved to be DKNG's critical support levels). We followed up with further updates suggesting why market operators were " quietly accumulating " in July 2022. We then followed up with a January 2023 article emphasizing that dip buyers are likely positioning for a " Fed pivot. " Accordingly, the FOMC's parlance from its recent commentary indicates that its hawkish stance has softened .

Accordingly, DKNG surged over 130% from its early January 2023 lows, taking out the bearish investors who shorted/cut exposure at DKNG's highly pessimistic levels.

Therefore, market operators attempted to "tire out" impatient buyers who didn't hold on to their bets between May 2022 and January 2023. Notably, DKNG formed several dips to re-test its critical support levels over that period.

Despite that, astute investors are likely aware that accumulation phases are typically "quiet," with no fanfare, allowing dip buyers to accumulate without triggering the momentum surges we have experienced since January 2023.

With that in mind, DKNG has recovered to highs last seen in February 2022, making a new 52-week high to close this week.

This week, management gave investors more reasons to be optimistic, as DraftKings posted a robust double beat on revenue and adjusted EBITDA terms.

As such, it corroborates the confidence of the high-conviction dip buyers who bought DKNG's highly pessimistic lows that 2023 will be a turning point for DraftKings' operating performances.

Notably, management lifted investors' optimism further, as it promulgated that it is aiming for adjusted EBITDA breakeven in FQ2 (better than Wall Street estimates). It's also confident of achieving full-year adjusted EBITDA profitability for FY24.

As such, DraftKings' ability to achieve scale efficiencies in its OSB business as one of the leading operators is critical. According to management, DraftKings has also attained the top position in the iGaming market, overtaking BetMGM ( MGM ) ( GMVHF ) as the market leader.

There are several critical takeaways from DraftKings' earnings commentary, suggesting why its scale has allowed it to accelerate its profitability cadence.

CEO Jason Robins and his team accentuated that it benefited from "an improvement in the company's structural sportsbook hold rate." It has also "reduced promotional intensity," lifting its margins further.

DraftKings invested over the past year to bring "in-house trading" capabilities to its tech stack, allowing the company to benefit from same game parlays opportunities in the MLB. It has also allowed the company to launch more "homegrown" products, including DraftKings Jackpot, which is "now live in three states across more than 100 slots and table games."

Therefore, we believe that DraftKings management has shown tremendous promise through DraftKings' increasing scale, data advantages, tech stack, and leading engagement.

As such, management has a viable track toward reaching sustainable profitability, encouraging more investors to return. Despite that, the battle is far from over, and investors shouldn't get too excited now, as DraftKings is still not profitable.

Moreover, "market share compression" remains a critical risk, including the entry of "well-capitalized competitors." As such, while DraftKings has attracted a narrow economic moat rating from Morningstar, its unprofitability (with potentially falling cash reserves) could hamper its effort to defend its market-leading position.

Management has performed admirably, leading to the best possible "A+" grade DKNG received for revisions by Seeking Alpha Quant. As such, it demonstrated that analysts had underestimated DraftKings' ability to track toward profitability.

However, DKNG's valuation has also reached highly unattractive levels with a worst possible "F" grade, down from the "C-" grade it received three months ago.

Our price action analysis also suggests that dip buyers are unlikely to return at the current levels as DKNG re-tests its February 2022 highs.

With that in mind, we move to the sidelines from here.

Rating: Hold (Revised from Speculative Buy). See additional disclosure below for important notes accompanying the thesis presented.

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