DraftKings Stock, Is There Royally Good Upside Ahead?

Key Points

• DraftKings Q1 report led to a trend of analysts' price target increases supporting the market. 
• The stock has a 20% to 40% upside potential, but gains may be capped at that point. 
• Competition and slowing growth are a concern for investors. 

DraftKings' NASDAQ: DKNG upswing is gaining momentum and offers a royally good upside for investors. The Q1 results were strong and came with robust guidance that sparked a wave of commentary from the analysts. The analysts are not uniform in their praise, but even the sole downgrade with the chatter had good things to say.

The takeaway for investors is that business momentum and maturing jurisdictions drive margin gains at an accelerated pace and have profitability in sight. Even so, there are risks that investors should be aware of because they could cap gains over the summer. 

The Analysts Are Driving DraftKings Higher 

The analyst activity in DraftKings has the stock in the 13th position on Marketbeat’s list of Most Upgraded Stocks. The 29 analysts rating the stock have it pegged at Hold with a price target about 1% above the current price action. The Q1 results sparked at least 16 updates, including 1 downgrade, 1 reiterated rating, 1 upgrade, and 14 boosted price targets. The price target is trending higher and supporting the market, with the most recent offering 20% to 40% upside. 

The takeaway from the bull camp is that resilient markets support this company in ways not seen in other discretionary names, market share is rising, customer acquisition costs are falling, and the path to profitability is clearer. UBS, which produced the upgrade, sees the news as accelerating the path to profitability, and profits may be reached in fiscal 2024. 

The bears are not without cause for concern. The primary arguments are that the path to profitability is not as clear as the bulls would hope, fewer new states are expected to legalize gambling in the coming years, and growth will slow. The next quarter’s consensus figures show that the slowdown is expected to begin this year.

The Marketbeat.com consensus for revenue in FQ2 is only $712 million, down 7% sequentially and up 52% YOY.

That’s down considerably from the 80% pace set for the last 2 quarters, and there are no major sporting events this summer to drive traffic. In addition to the price target, the analysts have been upping their targets for revenue and earnings, so the bar is set high. 

Insiders And Institutions Drive Volatility For DraftKings

Insider and institutional activity is mixed for DraftKings and drives volatility if nothing else. The insiders, including major shareholders, own about 56% of the stock and have only been selling. The selling is small and spread among execs and major shareholders, so it is not a red flag, but it still presents a headwind for the market. The institutions own about 30% of the stock and are also selling.

The activity is mixed and smacks of rotation within the group, which is not surprising given the state of the market. The risk is that institutions will continue to sell into the rally and provide another headwind for share prices. 

Another headwind is competition. DraftKings is gaining market share, but competitors like Fanatics are not sitting idly by. Fanatics just entered a deal to acquire PointsBets Holding Ltd., greatly improving its reach. The deal will allow access to 15 states with legalized gambling, including DraftKings key markets of NY and Michigan. While DraftKings remains the leader, this deal will cut into its growth outlook. 

The Technical Outlook: DKNG In Reversal 

DraftKings price action is in reversal and is likely to move higher. The next significant target for resistance is at the $30 level, consistent with the latest analysts' targets. If the market can’t get above that level, it will likely enter a new trading range while it waits for the next round of news and analyst revisions.