3 reasons Why DraftKings Stock Is High Despite the Sports Shutdown

DraftKings is currently receiving a lot of investor enthusiasm lately. The online sports gambling website has grown to be the second-highest in the U.S. gambling market, only behind Las Vegas Sands. The Sands has been a longtime leader in the profitable Macau casino market.

Wall Street has valued DraftKings at $9.9 billion, that’s around 14 times next year’s revenue, which is predicted to be around $700 million. However, Thomas Allen, an analyst at Morgan Stanley, doesn’t expect DraftKings to be profitable until 2023, when he expects $1.4 billion in sales.

MGM Resorts International is valued at $6.8 billion, Wynn Resorts sits at $8.4 billion, and Las Vegas Sands is valued at $34 billion. Due to their debt, MGM and Wynn have larger enterprise values. Alternately, DraftKings has around $450 million cash on hand and is spending $15 million to $20 million every month while major sports are suspended.

Despite the near-total shutdown of professional sports all over the world, Wall Street is still enthusiastic about DraftKings. DraftKings’ stock gained $4, or 15%, on May 15, to $29.23 following its first-quarter earnings report. The stock further gained another 32 cents, to $29.55, on May 18. Please also consider reading our story on why this may not be the best time to buy DraftKings stock here.

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Why Investors Love DraftKings

Investors love DraftKings’ online business model, compared to that of traditional, capital-intense casinos. Traditional casinos have been hit hard by the coronavirus closures, as well as social-distancing measures to the gambling floor as they reopen. Moreover, younger gamblers enjoy sports and are more likely to bet on their phones.

Analysts were even more impressed that DraftKing’s first-quarter core revenue was up 30%, to $89 million. Even more impressive is DraftKing’s pre-COVID-19 year-over-year gain of 60%. The company’s positive results also included its SB Technology unit, which provides tech services to online betting websites.

DraftKings currently offers betting on esports, table tennis, and the upcoming charity golf match for coronavirus relief between a team of Phil Mickelson and Tom Brady and Tiger Woods and Peyton Manning, who are favored to win.

Morgan Stanley’s Allen wrote in a note to a client, “Who knew Fantasy Korean Baseball was so popular.” He also wrote, DraftKings’ shift to different forms of daily fantasy sports and nontraditional sports betting content, such as esports and Korean fantasy baseball, indicate that near-term revenue declines will be less than previously expected. Allen expects to see revenue down 37% in the second quarter but going up by 8% in the third quarter.

Allen, like other analysts watching DraftKings, battle with its high valuation. He has calculated an overweight rating and a target price of $25. That is below its current price, but Allen also has a bull case that supports $75.

Allen’s $25 target price is a derivative from a multiple of 18 on projected 2025 earnings before interest, taxes, depreciation, and amortization of $648 million discounted back to 2020.

Allen believes the market will rightfully value DraftKings similar to high-growth internet stocks, and not like EU online gaming stocks.

As the only pure-play U.S. online sports gambling company, DraftKings has scarcity value. On the other hand, FanDuel is managed by British gambling giant Flutter Entertainment.

The Future of Online Sports Betting

Currently, 14 states with nearly 25% of the U.S. population have legalized online sports betting. The US sports betting market is led by New Jersey and Pennsylvania, with New Jersey as the biggest market. FanDuel and DraftKings dominate the fantasy sports market, have leveraged those leadership positions in the early online sports betting market.

The sports betting industry continues to see opportunity because the four most populous states, California, New York, Texas, and Florida, haven’t yet legalized online sports gambling. State budget problems due to the COVID-19 crisis could speed the legalization of online sports betting in those states.

DraftKings also is looking to capitalize on the small but growing online casino games market, such as slots, roulette, and blackjack. New Jersey has become a leader in the online casino games market.

During DraftKings’s first-quarter conference call, CEO Jason Robins commented, “We believe the combination of a currently large and underserved market along with the legislative momentum gives us the potential to build an environment of category expansion for a long time to come.”

Robins added that he doesn’t anticipate any impact to the company’s FY20-21 or long-term plans resulting from the Covid-19 crisis, assuming that the sports calendar resumes normally by 2021.

DraftKing’s shares have surged 68% since the company went public via a merger in April with Diamond Eagle Acquisition. The stock has almost tripled since it finalized the deal with Diamond Eagle, a special purpose acquisition company, in late 2019.

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