DraftKings (DKNG) stock price hasn't matched its on-field performance, JPMorgan argued in a new research note on Tuesday. The firm upgraded shares of the online gambling operator from Neutral to Overweight. It also boosted its price target from $26 to $37 as it believes DraftKings stock has lagged too far behind the S&P 500 Index (^SPX) since July.
Shares of DraftKings were up more than 4% at the market open on Tuesday.
"We are taking advantage of sluggish share price performance since late July given what we continue to think is an appealing sector, with attractive same-store and new market growth prospects, against the backdrop of an industry-wide improving operating expense control environment (in part due to an increasingly smaller percentage of revenues coming from newer markets, which have meaningful new user acquisition costs and up-front investment)," JPMorgan analyst Joseph Greff wrote.
DraftKings shares soared more than 175% on the year into July as Wall Street grew more bullish on the mobile sports operator amid market share gains. JPMorgan analysis shows that DraftKings increased its gross gaming revenue market share from 28% in the first quarter to 32% in the second quarter. In the second quarter of last year, the operator owned just 20% of gross gaming revenue market share, per JPMorgan.
DraftKings hold rates, the percentage of money the company keeps out of the total amount bet by customers, have increased as the company increases its accuracy on odds making and customers move to more profitable betting options. This, JPMorgan argues, will continue as the legalized sports gambling market grows.
"Customer acquisition costs can continue declining as national scale is achieved and sales/marketing costs fall precipitously," Greff wrote.
DraftKings has projected its first full-year of profitability for 2024. But concerns had weighed on the company's path toward to that goal after two major new entrants came into the market just before the start of the crucial football season.
On Aug. 8, Penn Entertainment (PENN) ditched Barstool Sports and signed a $2 billion deal with ESPN, the self-proclaimed worldwide leader in sports. Penn is aiming to launch ESPN Bet in November and hopes the new brand can earn it double-digit market share, up from its current low-single-digit share.
Meanwhile, Fanatics, an e-commerce giant, recently launched its own sportsbook headed by former FanDuel CEO Matt King.
JPMorgan believes DraftKings will be able to stand its ground against the new competitors.
"We think DKNG has a strong moat (product, scale, brand) that should allow it to compete against new entrants like PENN's ESPNBet and Fanatics, much like it competed against Caesars," Greff wrote, highlighting DraftKing's fighting off Caesars (CZR) in a battle for customers during an aggressive marketing push in 2022.
Josh Schafer is a reporter for Yahoo Finance.
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