DraftKings Is Down But Not Out

Keep DraftKing’s Q3 Performance In Perspective

Shares of DraftKings NASDAQ: DKNG took a big hit last week when the company reported earnings but it is a classic knee-jerk reaction to some news that we see opening up a buying opportunity. The company missed the consensus estimates by a very wide margin but there are two factors that make the comparison meaningless. The first is guidance, DraftKings guided the market to a certain level for Q3 and it hit that level. It’s not DraftKings’ fault if the analysts got overzealous. The second is football. The NFL season has been a real disappointment in regards to gambling because of the outcomes. The fans just aren’t interested but that will change just like next year’s league results. The takeaway is that DraftKings produced stellar growth and guided the market higher setting the stock up for a rebound later this year or in early 2022. 

DraftKings Q3 A Slam Dunk 

DraftKings Q3 growth was extraordinary given the fact NBA and NHL growth was minimal (those leagues were in operating last year) and the NFL didn’t produce the volume it could have. The company reported $213.00 million in consolidated revenue which is good for growth of 60.2% over last year. The problem with the analysts is that consensus was closer to $238 million but the slump in NFL-related earnings more than makes up the difference. The company estimates sluggish activity in the segment trimmed $40 million off the top line, more than enough to have put revenue above expectations. 

The gain in revenue was driven by increases in monthly active users and revenue per user that we see extending well into next year. The company says Monthly Unique Players is up 31% with a 38% increase in revenue per client. The revenue gain was in turn driven by an increased offering and cross-selling to its clientele. DraftKings is still a pre-profit company and investing heavily in its growth. The company’s balance sheet is still quite strong, however, and net cash. 

The Analysts Still Like DraftKings 

The analysts were quick to come out in defense of DraftKings citing many of the same factors we are focusing on. The company’s increase in users and revenue per user bodes well for future growth in addition to the expectation of more normalized volume in next year’s NFL season. That, in addition to the company’s investment into its own technology and the many growth initiatives taken over the last quarter, has the company set up to deepen its penetration, expand its coverage, and widen its offerings in North America. 

Only one analyst has made a change to their position since the Q3 release and it is mixed. The team at Oppenheimer maintained the Outperform rating but lowered the price target to $70 from $80. That compares to the $67.95 Marketbeat.com consensus estimate which assumes an upside near 55%. The high price target is $100 and set by Loop Capital. That target was set way back in 2020 so may not be as relevant as it could be. 

The Technical Outlook: DraftKings Falls To Support 

Shares of DraftKings fell to support in the wake of the Q3 report but support is holding. Price action moved up from the $42.50 level and looks like they will continue higher in trading this week. The indicators are also telling with divergences confirming support and pointing to a reversal in price action. Assuming price action can maintain support at this level, we would expect it to move up and retest resistance at the short-term moving average. A move above the EMA would be bullish, if resistance is confirmed the stock may consolidate at the current levels until the outlook becomes a little clearer.