DraftKings Product Investment Could Be Catalyst, Says Analyst
DraftKings (NASDAQ: DKNG) shares have decreased by 9.52% so far this year, a trend that arguably undermines the operator's robust technology platform and its top position in product innovation.
Jefferies analyst David Katz emphasized the sportsbook giant's product investment, particularly regarding in-game wagering, in a recent commentary included in the firm’s updated Franchise Picks list. This is a collection of 28 stocks abundant in catalysts that are priced in a way that indicates potential growth. DraftKings is the sole gaming brand presently included on the list. Katz assigns the stock a "buy" recommendation with a target price of $60.
"We think investments to enhance DKNG products, including the recent focus on in-play betting, could be a key product differentiator and growth driver,” notes Katz. “Further, we expect that the evolution of existing markets, additional states legalizing over time and the Jackpocket acquisition represent incremental positives.”
Last year, DraftKings revealed its agreement to acquire Jackpocket, an online lottery courier, for $750 million. Fifty-five percent of the purchase price was settled in cash, while the rest was financed through the buyer’s stock. Considering that lottery participants typically remain steadfast during economic downturns, the Jackpocket partnership might enhance DraftKings' profits over time, especially with the growing number of states legalizing online lottery sales.
DraftKings Investors Might Be Experiencing Paralysis Due to Overthinking
With the growth of the US sports betting market and the related equities in recent years, certain investors have sought to extract stock-specific insights from the monthly reports provided by states where online sports wagering is allowed.
According to Katz, data from month to month can be unpredictable, and placing excessive reliance on those reports “is shortsighted and overlooks the long-term trend.” The analyst notes that the local sports betting market is expanding faster than anticipated, suggesting a greater profit potential than what current forecasts indicate.
Katz recognized that state-level gaming tax rises are a short-term issue, although the dangers are “exaggerated,” and considering another tax increase in Illinois is already factored in, tax hikes from other states are expected to be minimal.
“However, digital operators have traditionally managed to offset tax hikes by refining promotional approaches and re-evaluating market access pathways,” Katz notes. “We still believe that the product evolution of the company will enable it to maintain its leadership position in the US throughout market maturity.”
DraftKings Holds Catalysts
A recent theme affecting DraftKings and other sports betting stocks is the realization that bettors are not as poor as once believed. This was observed in the fourth quarter when DraftKings and its competitors reported earnings impacts due to favorable NFL results for customers — a trend that continued into the first quarter during the Super Bowl and the upset-free NCAA Men’s Tournament.
That trend is expected to return to the average, and Katz continues to project that DraftKings will report 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) of $850 million, with that amount increasing to $1.5 billion the following year.
“We expect to see 90% free cash flow conversion next year,” concludes the analyst. “In our view, mean reversion on sports outcomes should return to the history of beats/raises, coupled with the clear path to cash generation, creating greater stability and downside protection for DKNG. In addition, the advent of in-play betting volumes in the US is underrepresented in estimates, which is bullish for the shares.”