DraftKings: New highs not a gamble for this market

Key Points

• DraftKings had a solid quarter despite missing the analysts' consensus for revenue by less than 100 bps. 
• Adjusted margin improved and was better than expected, leading to enhanced guidance. 
• Analysts are defending their bullish positions and helping to support the market; a rebound may come soon. 

The DraftKings Inc. NASDAQ: DKNG share price fell more than 5% following the Q4 release and guidance update, and it could be bad news for investors. 

A 5% move is substantial for an equity stock and may lead to a deeper correction or even a reversal in the price action. However, as bad as that sounds, the move in DraftKings is a healthy correction within a raging bull market that will lead to higher prices and new highs soon. 

The Q4 results were tepid, only relative to robust expectations. Analysts' estimates aside, the company produced nearly 50% year-over-year (YOY) revenue growth. The miss was slim, offset by wider-than-expected margins and hot guidance. 

The news sparked a reset among the analysts but not regarding the share price. The early take from chatter is that analysts defend their positions, bringing an overheated market to reality. 

The market overran analysts' estimates for DKNG; the uptrend is intact

How does the 5% decline compare to analysts' price target estimates? 

Very well. The 5% pullback has the market near $42, above the analysts' consensus target and critical support. The critical support combines recently broken resistance and the short-term 30-day moving average. If it is confirmed as support, it will signal a continuation of the existing uptrend. 

MarketBeat.com has tracked more than two dozen analysts' reports and revisions since August 2023. The action lifted the consensus to "moderate buy" from "hold" and the price target by 100% as of mid-February 2024. The freshest targets include the highest, $55, more than 30% above the post-release action. 

Needham, another recently set target, reiterated a "buy" rating and $50 target, implying a buying opportunity is at hand for this consumer tech stock. 

DraftKings growth is slowing, but valuations are coming into alignment

DraftKings has had a solid quarter despite the comparison to analysts' consensus. The company reported $1.23 billion in net revenue, a gain of 44% over last year. The miss is slim, only one cent, less than 100 bps, and offset by user growth, penetration, margin and guidance. 

Monthly active users are up 37%, compounded by a 6% increase in revenue per user driven by new markets, improved access and cross-selling opportunities. Gains in Q4 bring the cumulative growth to roughly 200% over the last six quarters. Revenue would have surpassed consensus if not for favorable consumer outcomes late in the quarter. 

Promotional and cross-sellings helped to improve the company hold rate and boost the bottom line. The GAAP results show a loss related to ramping activity but not enough to upset the balance sheet. Adjusted earnings came in at 29 cents, beating the consensus estimate by more than a dime, reversing last year's loss. 

Guidance isn't a grand slam, but a solid hit for investors. The company raised its revenue and earnings mid-points above the consensus estimates with acquisitions and new market penetration to aid momentum. Among the drivers in 2024 are the opening of markets in North Carolina and Puerto Rico to mobile gaming, representing 4% of the addressable U.S. market. 

Discounts to share prices and improved outlook for earnings are helping to align the valuation with growth. 

The technical outlook: DraftKings support is already evident

The market is down following DraftKings' report but already showing support above the critical levels, bobbing up and down within a tight range. If the market follows through on the signal, it could begin to rebound immediately and result in a new high for the stock. If not, DKNG could pull back to the $40 level or lower before a solid signal is given. 

There is a possible headwind for the market associated with the insiders. Insiders own 50% of the company and are selling into the rally. Sales have been small over the last 12 months, worth only 0.6% of the current market cap, but have been ramping sequentially and may increase as share prices increase.