DraftKings Stock: Market Leader Isn’t Cheap – Upgraded to Buy (NASDAQ:DKNG)

Previously featured DraftKings (Nasdaq:DKNG) discussed an impressive FQ3’23 earnings report in November 2023, with strong growth in Monthly Unique Payers (MUPs) and average revenue per MUP suggesting stickiness of its gaming platform. Loyal consumers with strong purchasing power.

Still, we maintained our Hold rating because the company’s stock continues to trade at a premium to its peers and PENN Entertainment’s ESPN Bet is a big player.pen) may be the case.

So far, DKNG has exceeded expectations by reporting stellar earnings results for FY23 and Q1FY24, with the stock posting a +8.5% return versus the broader market’s +16.4%.

While the company has raised its guidance for fiscal 2024, it still boasts the largest gaming market share in the U.S. As DKNG remains the market leader, we have been too bearish so far and have raised our rating to Buy.

Let’s discuss further.

DKNG’s investment thesis is inherently compelling, and market leaders aren’t cheap.

For now, DKNG is reporting earnings that are two times higher than expected for the first quarter of 2024. Revenue: $1.17 billion (QoQ: -4.5%/ YoY increase of 52.6%), Adjusted EBITDA was $22.39 million, down 85.1% from the previous quarter and up 110.1% from the previous year.

Much of the revenue tailwind came from sustained growth in MUPs to 3.4 million (-100,000 QoQ, +600,000 YoY), meaning the company was able to retain its existing user base while acquiring new customers in new jurisdictions such as Vermont and North Carolina.

At the same time, with average revenue per MUP rising to $114 in the most recent quarter (-1.7% QoQ, +23.9% YoY), it’s clear that DKNG is also increasing volume per user as it improves the overall customer experience and accelerates penetration into new jurisdictions.

Readers say part of the sales tailwind is due to fully integrated Golden Nugget Online Game The acquisition is expected to close in May 2022 and is already “enhancing cross-selling opportunities and driving revenue growth.”

At the same time, DKNG’s bottom line was boosted by management’s relatively efficient adjusted operating expenses of $510.22 million after deducting non-cash stock-based compensation in the most recent quarter (+14.7% QoQ, -1.9% YoY).

Adjusted EBITDA margin expanded to 1.9% (-10.3 points quarter-on-quarter/+30.6 points year-on-year) driven by increased sales and efficient operations, demonstrating a “near-scale fixed cost structure” so far.

As a result, DKNG’s increased guidance for fiscal 2024 is not surprising, as it now expects revenue to increase to $4.9 billion (up 33.8% year-over-year) and adjusted EBITDA to $500 million (up 431% year-over-year) at the midpoint, compared to its initial guidance of $4.77 billion (up 30.2% year-over-year) and $460 million (up 404.5% year-over-year) provided in its fourth quarter 2023 earnings call.

Readers should also note that these figures are not yet taken into account. Recently completed Jackpocket acquisitionThe transaction is expected to deliver up to $340 million in incremental revenue and $100 million in adjusted EBITDA by fiscal year 2026, ultimately driving increased sales and earnings for DKNG.

As a result, the acquisition of Jackpocket is expected to result in moderate share dilution, however, the expansion into digital lottery services is indeed highly strategic and DKNG is expected to acquire Jackpocket’s “A database of 6 million customersWe have 1.8 million active users and 700,000 monthly unique users.”

At the same time, DKNG’s cash burn is also likely to ease from here, with the balance sheet likely to improve from 1Q24 reported cash and cash equivalents of $1.19 billion (-6.2% QoQ, +10.1% YoY) and debt of $1.25 billion (inline QoQ, inline YoY).

Consensus Forecast

It’s no surprise, therefore, that the consensus is raising future estimates, with DKNG expected to generate revenue/earnings growth at +23%/+156% CAGR through FY2026.

This compares with initial estimates of +21%/+148% and historical revenue growth of +63% from FY2016-FY2023.

DKNG Rating

It is therefore understandable why DKNG commands a FWD EV/EBITDA valuation of 40.79x and a FWD price/cash flow valuation of 39.82x, compared to the sector medians of 9.75x and 9.95x, respectively.

Flutter Entertainment plc, the owner of FanDuel,flatGiven that ESPN Bet is at 17.26x/23.26x and PENN is at 9.72x/9.51x, it is hard to deny that the premium for DKNG is justified, despite previous concerns about ESPN Bet. (Interested readers should read our recent coverage of PENN.) here).

When comparing DKNG’s consensus future forecasts with FLUT’s revenue/profit CAGR of +13.4%/ +26.1% and PENN’s +5.7%/ +10.3% through FY2026, it’s clear that the former’s profitable accelerated growth justifies a premium valuation.

Online gaming market share

This is something DKNG is especially proud of. Top share in the gaming market By the fourth quarter of 2023, its U.S. share will reach 32%, second only to FanDuel’s 35%, although data for the first quarter of 2024 is still available.

At the same time, the size of the US OSB market $40 billion by 2030This suggests that DKNG is likely to continue reporting profitable growth over the next few years, maintain its leading market share, and expand user engagement.

Is DKNG Stock a Buy?sell or hold?

DKNG 4Y Stock Price

Similar bullish support is being seen in DKNG stock, whose +265% recovery since the start of 2023 has well outpaced the broader market’s +38.3%.

Based on management’s increased 2024 adjusted EBITDA guidance midpoint of $500 million (231% increase year over year) and the current outstanding shares of 474.22 million, the company expects adjusted EBITDA per share to be $1.05.

Combined with a FWD EV/EBITDA valuation of 40.79x, the stock appears to be trading around our fair value estimate of $42.80.

Based on a similar methodology, and using the consensus 2025 Adjusted EBITDA forecast of $1.01 billion, this would result in Adjusted EBITDA per share of $2.10, resulting in an excellent potential to be twice our mid-term price target of $85.60.

Author’s rating

Does this mean we’re finally retracting our statement and upgrading DKNG shares to a Buy after two Hold ratings?

Yes, indeed, but there is no specific recommended entry point as it depends on each individual investor’s dollar cost averaging and risk tolerance.

In this case, we believe that better late than never, especially since market leaders are not exactly cheap.