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DraftKings: Breaking Down BTIG’s New Neutral Call

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Betting on sports is supposed to be exciting. But betting on a sports gambling platform like DraftKings (DKNG) with a weak "neutral" rating? Not so much.

Nevertheless, that's what BTIG analyst W. Clark Lampen decided to do Tuesday, initiating coverage of the sports betting platform with a "neutral" rating and no particular price target.

"DraftKings was one of the early pioneers of daily fantasy sports (DFS) and has leveraged that head start to become the second largest operator in a rapidly expanding US online sports betting (OSB) and online casino (iGaming) market," reminds Lampen. Average spending by gamblers on the site is rising, and the company is planning a "substantial US expansion" of its business, and expanding its product portfolio as well.

Although Lampen doesn't anticipate DraftKings taking enough market share to become No. 1 in the U.S., he does anticipate at least "generally stable share" that should translate into growing revenues as DraftKings grows along with "substantial market growth" in sports betting overall.

In the near term, Lampen notes that eight U.S. states are expected to either legalize online sports betting, or increase access to online gambling offerings "soon," which could give DraftKings new places to grow. Longer term, the analyst sees "legalization and adoption growth [across the U.S. giving DraftKings] a multi-year runway." States that would be "major dominoes" that could offer above-average growth should they legalize online betting include Florida, Texas, and California.

Even given all the above, for the next couple of years at least, Lampen doesn't see much chance of DraftKings earning a profit, forecasting instead earnings before interest, taxes, depreciation, and amortization (EBITDA) of negative $601 million this year and negative $600 million next year. This is despite his prediction that revenues will exceed Wall Street expectations, at $1.25 billion this year, and $1.76 billion next year.

(Read more: DKNG Stock: Attractive after Recent Dip?)

One thing that could change this calculation is the potential for the company to enter into mergers & acquisitions deals that could further grow the business. In this regard, Lampen noted that he has "reduced visibility around the Entain deal." And indeed, just earlier Tuesday, DraftKings announced that has decided to abandon its $22 billion cash-and-stock bid to acquire British sports betting platform Entain (which has a joint venture with rival gambler MGM in the U.S. -- the BetMGM platform).

DraftKings shareholders hailed the collapse of that deal yesterday, which they seemed to think too expensive, bidding DraftKings stock up 4% in Tuesday trading. It's not clear what Lampen thinks of this development -- indeed, his note appears to have been written before the news was announced.

All that is clear is that, even if the merger had been accomplished, it probably wouldn't have been enough to swing BTIG's rating over from "neutral" to "buy."

What do other analysts say about the sports gambling platform? TipRanks analytics show out of 17 analysts, 11 are bullish on DKNG stock, while 5 are sidelined, and 1 is bullish. The consensus price target of $69 shows a potential upside of 44%. (See DKNG stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.