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DraftKings: The Bull Case Isn’t Strong Enough… Yet, Says Analyst

TipRanks
·3 mins read

Several names have made a big market entrance in 2020 and you can count DraftKings (DKNG) among them. The opportunity in online sports betting has evidently caught investors’ imagination and as a result, shares up by 378% year-to-date.

However, last week the stock experienced a pullback to the tune of 23%, after the company announced the sale of 32 million shares to prop up the balance sheet.

Considering the sell-off, is now the right time to pull the trigger on DKNG shares? Not according to Deutsche Bank analyst Carlo Santarelli.

The 5-star analyst initiated coverage of DraftKings with a Hold rating and a $48 price target, which implies a 6% drop from current levels. (To watch Santarelli’s track record, click here)

Santarelli sees many positives in the developing DraftKings story, including a powerful brand, a head start on peers and a well-defined long-term strategy. Yet, the analyst has an interesting take on why he currently recommends investors stay on the sidelines for now.

“Our Hold rating is not a call on valuation, because, quite simply, it doesn't matter if it doesn't make sense to us, as this is a pure play online gaming company with few truly comparable peers in what we expect will be a fast-growing top-line environment,” Santarelli explained. “That said, our Hold rating is based on our view that the near- to medium-term items that we believe will move shares are balanced, with some positives and negatives likely to emerge in the coming months and quarters – and in scenarios where 'valuation doesn't matter,' we would prefer a cleaner catalyst path.”

Adding to the positives mentioned above, Santarelli believes DraftKings’ “elongated growth story” is likely to position it as a leader in OSB. However, the lack of clarity in the near term is because the “story boils down to the pace of legislation.”

The market, Santarelli says, is anticipating a TAM (total addressable market) of over $20 billion, which means investors are “effectively betting on seamless legislation.” While Santarelli does not dispute more states coming on board in the coming months and years, the legislation process as evidenced recently in Massachusetts - the state put a hold on legalizing sports betting - is rarely straight forward.

Or as Santarelli puts it, “expecting this to be a seamless process and one that leaves the public equity operators in prime positions in key states, in our view, is like betting on the Washington Generals, sure you can do it, but history implies you'll be frustrated.”

So, that’s Deutsche Bank’s view, let’s take a look now at what the rest of the Street has in mind for DraftKings. Based on 12 Buys and 6 Holds, the analyst consensus rates the stock a Moderate Buy. With an average price target of $57.35, the analysts expect shares to appreciate by 12% over the next months. (See DraftKings 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.