Posted on: February 22, 2022, 08:56h.
Last updated on: February 22, 2022, 10:21h.
After shedding more than a quarter of its value last week, DraftKings (NASDAQ:DKNG) is dealing with more bad news today. At least eight Wall Street analysts are cutting price targets on the downtrodden sports betting stock.
Adding insult to injury, three of those price estimate revisions are at $19, implying only modest upside from the $18 handle at which the sports wagering equity currently resides. Today’s most dramatic DraftKings price outlook alteration comes courtesy of Wells Fargo analyst Daniel Politzer, who in downgrading the shares to “equal weight” from “overweight,” pares his price estimate to $19 from $41.
We remain bullish on US digital gaming, but prefer Caesars Entertainment and Flutter Entertainment here; our downgrade is company specific and reflects our growing concern on DKNG’s path to profitability, given its fast-growing operating expenses (as opposed to external marketing/promotional spend, which have been a concern among investors),” said the analyst in a note to clients.
Wall Street’s bearish view on DraftKings arrives after the stock tumbled more than 21 percent last Friday — a slide prompted by the sportsbook operator forecasting a wider-than-expected 2022 earnings before interest, taxes, depreciation and amortization (EBITDA) loss. Further irking investors are DraftKings’ costs, which Politzer notes will rise more rapidly this year than revenue.
“DKNG’s implied 2022 [operational expense] will increase 60 percent year-over-year vs. its expected ~49 percent revenue growth,” notes the analyst.
DraftKings Insult to Injury
Heading into today, DraftKings already endured multiple price target cuts this year, as analysts soured on high promotional spending and a lengthy road to profitability.
With so many analysts taking the ax to DraftKings price forecasts, the consensus estimate on the name is now $47.27, or more than two and a half times higher than where the stock currently resides. That means that in the span of a month, DraftKings’ price target fell by about $12. As recently as last October, the consensus estimate on the gaming name was close to $70.
Of the analysts trimming price outlooks on DraftKings today, only Politzer downgraded the stock, while three maintained the equivalent of “hold” ratings on the shares.
There’s one upgrade to speak of, as Roth Capital’s Edward Engel — long a DraftKings bear — lifts his rating on the stock to “neutral” from “sell” while reducing his price forecast to $19 from $23.
Good News, Bad News
In a report to clients today, Engel praised DraftKings for increasing transparency, while noting the company’s 2022 revenue outlook doesn’t include the pending acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG) nor does it reflect entries into Maryland, Ohio, and Ontario, Canada.
The analyst believes GNOG could add $100 million in revenue, while Maryland and Ontario could drive another $50 million to $100 million. However, he offers up some concerning tidbits, including that the operator “is cutting it close with liquidity,” and that a capital raise would be necessary to fund expansion into California, Texas, and Florida if those states legalize online sports betting (OSB).
“While we believe DKNG can avoid raising equity before its converts mature in 2028, this would require enough EBITDA in 2026-27 to underwrite new debt (or for DKNG shares to rebound 300 percent+ to $70). That said, if California, Florida, or Texas were to legalize OSB before then, this would accelerate cash burn and likely require an equity raise,” said Engel.
DraftKings sold $1.3 billion in convertible debt last year, and holders of those bonds have rights to convert to DraftKings equity at $70 a share in 2028.