2023-11-23 09:00:00 ET
Summary
- DraftKings has recorded a stellar performance thus far, both in the growing sales/ narrowing losses and active user retention, naturally explaining the growth premium embedded in its stock valuations.
- However, with ESPN Bet in the picture, we believe that DKNG's aggressive FY2024 profit targets may be at risk, with the management likely intensifying its marketing and promotional spend.
- We are also uncertain if the stock is able to sustain this upward momentum, as observed in its immense rally by +250% YTD.
- Based on DKNG's movement thus far, it also appears that the stock may very well rip and fall as it has after the FQ2'23 earnings call in August 2023, with it likely to retrace to its support level of $32s.
- As a result, we believe that it may be more prudent to wait on the sidelines for now.
We previously covered DraftKings (DKNG) in October 2022, discussing its uncertain prospects, as the Fed's sustained rate hike triggered an overall market-wide correction after the hyper-pandemic boom.
While the management had guided positive contribution margins in FY2022 and positive Free Cash Flow margins in FY2023, we had preferred to rate the stock as a Hold (Neutral) then, since there might be more downside in the near term.
Since then, the DKNG stock has indeed further retraced by over -20%, but successfully bounced off its critical support levels of $11s and recorded an immense recovery over the past eleven months.
However, we maintain our Hold rating, since the stock continues to trade at a premium over its peers, with it remaining to be seen how the competition from ESPN Bet may turn out.
We shall discuss further.
The DKNG Investment Thesis Has Improved Drastically, Though Still Overly Optimistic Here
For now, DKNG has reported a double beat FQ3'23 earnings call , with revenues of $789.96M (-9.7% QoQ/ +57.4% YoY) and GAAP EPS of -$0.61 (-258.8% QoQ/ +39.4% YoY).
The management has also offered excellent FY2023 guidance , with revenues of $3.69B at the midpoint (+64.7% YoY) and adj EBITDA losses of -$105M (improved from -$721.78M in FY2022).
Perhaps much of DKNG's tailwind is attributed to the sustained growth in its Monthly Unique Payers to 2.3M in FQ3'23 (+9.5% QoQ/ +40% YoY) and Average Revenue Per MUP to $114 (-16.7% QoQ/ +14% YoY), implying the stickiness of its gaming platform and loyal consumers with robust spending power.
This trend is also further aided by the management's sustained cost optimizations with operating expenses of $532.41M (-6% YoY), naturally contributing to its narrowing adj EBITDA losses of -$153.41M (+41.9% YoY) and adj margins of -19.4% (+33.2 points YoY) in the latest quarter.
Perhaps this is why DKNG felt confident to guide impressive FY2024 numbers, with revenues of $4.65B (+26% YoY) and adj EBITDA of $400M at the midpoint (+480.9% YoY), implying that its reversal to sustainable profitability may finally be here, as the company achieves an economy of scale.
DKNG Valuations
Seeking Alpha
However, since DKNG has yet to report consistent profitability, the only metric that we may use to measure its valuation is the FWD EV/ Sales of 4.93x, which is notably higher than its 1Y mean of 3.22x and the sector median of 1.15x.
The Consensus Forward Estimates
Tikr Terminal
Perhaps this is attributed to the optimistic consensus forward estimates, with DKNG expected to record an impressive top-line CAGR of +32% through FY2026, building upon its historical growth of +77.38% between FY2018 and FY2022, respectively.
In addition, the gaming company is expected to record positive EBITDA and FCF margins from FY2024 onwards, likely to sustain its future operations, without having to increase its reliance on capital raises and/ or FQ3'23 long-term debts of $1.25B (inline QoQ/ YoY).
This means that DKNG may be able to moderate its cash burn while sustainably growing its balance sheet from henceforth, from the cash/ equivalents of $1.11B (inline QoQ/ -19.5% YoY) reported in the latest quarter.
Then again, we also believe that current levels do not offer a compelling investment thesis, with the stock trading beyond our long-term price target of $28.56. This is based on the sector median FWD EV/ EBITDA valuation of 9.65x, the consensus FY2026 adj EBITDA estimates of $1.37B, its FQ3'23 share count of 464.77M, and an estimated adj EBITDA per share of $2.96.
Even then, this estimate for DKNG is already rather optimistic, well exceeding many of its more successful peers, such as PENN Entertainment's ( PENN ) FWD EV/ EBITDA valuation of 8.23x and Caesars Entertainment ( CZR ) at 8.77x.
So, Is DKNG Stock A Buy , Sell, or Hold?
DKNG YTD Stock Price
Trading View
While we understand why long-term investors may be highly encouraged by the positive developments above, naturally explaining the DKNG stock's bullish recovery by +250.05% YTD, we also believe that there is a minimal margin of safety here.
With it easily outperforming its peers and multiple high-growth ETFs YTD, we are uncertain if the stock is able to sustain this upward momentum, especially with the increased competition offered by EPSN Bet, as similarly discussed in my PENN article here .
For example, the partnership between PENN and Disney (DIS) already proves to be highly promising, with the ESPN Bet app clinching the number one spot in the free sports app downloads in both the Google Play Store and iOS App Store, implying the great consumer interest surrounding the "Official Sportsbook of ESPN."
This development is unsurprising, due to ESPN's growing streaming subscriber base to 26M (+3.1% QoQ/ +6.9% YoY ) by the latest quarter.
Most importantly, PENN and DIS are both well-capitalized to ensure the success of the gaming platform, with the former likely to benefit from the potential cross-selling to its other offerings, once consumers are embedded in its gaming ecosystem, similar to its previous performance in Ontario .
With DKNG likely to be impacted to a certain extent, both in the number of active users and average spending in the upcoming FQ4'23 quarter, we believe that it may be more prudent to wait on the sidelines for now. This is because the management may have to intensify its marketing and promotional spending to retain users and therefore, likely putting its FY2024 profit targets at risk.
DKNG 5Y Stock Price
Trading View
Based on DKNG's movement thus far, it also appears that the stock may very well rip and fall as it has after the FQ2'23 earnings call in August 2023. Assuming so, we may see the stock retrace to its support level of $32s after much of the optimism is moderated.
Even then, we do not advise anyone to add here, due to the minimal margin of safety at current levels.
As a result, we maintain our Hold (Neutral) rating on the DKNG stock here.
For further details see:
DraftKings: ESPN Bet May Derail Its FY2024 Profit Targets