DraftKings upgraded to Overweight: Analyst explains why

DraftKings (DKNG) received an upgrade from Barclays to Overweight from Equal Weight. The firm also raised its price target of the stock to $50 per share from $41.

Barclays Director and Equity Research Analyst Brandt Montour, who issued the upgrade, joins Yahoo Finance to discuss the reasons behind his call and what it could mean for the company moving forward.

When asked about the company's recent acquisition of the lottery app Jackpot, Montour says: "We think about that business as a very rich customer acquisition pool. These are customers that obviously play the lottery, right? And I think there's going to be a very good overlap between people that play the lottery and people that are willing to sports bet or try internet casino on their phones. We talked about parlays, which is basically sports bets that become kind of like a lottery ticket, like picking five or six or seven different outcomes of a game, or two games or three games, that you have to hit all of them correctly to get a very large payout. It's like a long-odds option or like a lottery ticket. I think there's going to be a lot of overlap there."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: Shares of DraftKings higher today after getting an upgrade to overweight from Barclays. Let's now bring in the analyst behind that call, Brandt Montour, Barclays senior equity research analyst for gaming, lodging, and leisure.

Brandt, it is good to have you on the show. So you're a DraftKings believer, Brandt. You go to overweight. Your target here goes to 50. How come, Brad? Just walk us through the argument of why this one is now a buy.

BRANDT MONTOUR: Now, thanks, Josh, for having me on the program. I and my team have come to really appreciate the strength of the underlying online sports betting market, the underlying i-casino market. And, essentially, the outlook for these two combined businesses and the ultimate size for these businesses.

So we took up our expectation for the size of these businesses. We've been especially impressed by DraftKing's ability to gain and sort of sustain top two market share across both of those businesses. And we also think that there's sort of an emerging trend of parlay play and parlay business is good for margins, is good for whole we call hold in the Casino businesses, which is how much the sportsbooks keep of the betting volumes. And so that has a tailwind as well.

So there's multiple a couple of things. Keeping DraftKings growing here. And we thought it was a good time to enter into the fray on a 10% pullback over the last couple of weeks.

JULIE HYMAN: And, Brandt, just to dig a little bit deeper into that, and even bigger than DraftKings, you guys are increasing your estimate for the total addressable market of iGaming, of online sports betting. What changed in your view, or what did what was revealed to you as this has been growing that makes you think it could be even bigger than what you thought before?

BRANDT MONTOUR: Yeah, thanks, Julie. So we took a harder look at the older states. So this is states like New Jersey, Pennsylvania on the sports side, and Michigan. And we've been pretty astounded by how fast the revenue continues to grow for those older states. So 25% to 30% GGR gross gaming revenue continues to grow in those states.

Now, so we basically took up our total addressable market expectations for the sports side just on those older states alone continuing to grow at reasonable rates from here having outgrown what we formerly had expected those markets to get to. We haven't changed our expectations for internet casino which you mentioned, which is growing at a healthy clip those older states for iGaming are growing 20%, plus still as well.

But we didn't change our TAM on that. And we basically need to see some movement on new states legalizing before we would up the iGaming side.

JULIE HYMAN: Gotcha.

JOSH LIPTON: And, Brandt, what about this news, their decision to buy this lottery app jackpot for $750 million. Brandt, in your opinion, a smart move, a smart decision?

BRANDT MONTOUR: It's an interesting acquisition, right? It's a business that they're not in. I mean, I think we think about that business as a very rich customer acquisition pool.

These are our customers that obviously play the lottery, right? And I think that there's going to be a very-- there's going to be a very good overlap between people that play the lottery and people that are willing to sports bet or try internet casino on their phones.

We talked about the parlays which are basically sports bets. That become kind of like a lottery ticket, right? Picking five or six or seven different outcomes of a game or two games or three games, that you have to hit all of them correctly to get a very large payout.

It's kind of like a long-odds option or like a lottery ticket. So I think that there's going to be a lot of overlap there. I think it's going to be good for their customer acquisition, costs when trying to source customers from that. That's the point of the acquisition, not because I think that they want to be in the lottery business longer-term, I think it's more of a customer acquisition tool. I think it's going to be a good one.

JOSH LIPTON: And, Brandt, let me get you out here on this basic question about valuation. Because this one, it's had such a move, Brandt. you know, it's up about 115% over the past 12 months. But valuation must still look attractive to you, I guess.

BRANDT MONTOUR: Yeah, look, there's nothing-- like this in brick and mortar casino land or hotel land or cruise land the other sectors, we cover here. I mean, it's more of a technology company.

We think it should be benchmarked versus internet companies and technology companies. When we look at internet companies below 50 billion market cap growing top line like DraftKings is, 20% to 25% on average over the next couple of years.

Those internet stocks trade at 4 and 1/2 times or above revenue, they trade at 25 to 30 times EBITDA. And this is within that range or even slightly attractive. So I don't think that valuation is stretched.

It's not valuation isn't a key reason why we have a buy on it now. It doesn't necessarily scream attractive on a valuation perspective, but it's also not stretched for what you're getting.

JULIE HYMAN: Brandt, thanks so much. Have a great weekend.

BRANDT MONTOUR: OK, you too.