Digital sports gaming leader DraftKings (NASDAQ:DKNG) faced a tough 2020 as professional sports leagues operated on abbreviated schedules throwing the company a curveball. But with COVID-19 vaccine distribution progressing and more states leaning towards legalizing online gambling, the company looks ready to hit a home run.
DraftKings sits on the throne of an industry that is in the early innings of a massive global growth market. Like other high growth app related tech companies, it will undoubtedly face continued regulatory, competitive, and pandemic hurdles, but is poised to sprint to new highs in 2021.
How Did DraftKings Perform in 2020?
All things considered DraftKings had a pretty good 2020. With major sports leagues idle or operating via truncated formats, opportunities were limited for fantasy sports enthusiasts. But with more free time at home and a lack of entertainment options, many people turned to wagering on even the most obscure of sports. This drove more customers to DraftKings and generated some respectable revenue during a seemingly impossible time.
The company is still operating at a net loss, but its overall financial strength is solid. It has a $1.1 billion cash position that is 14 times what it was at the end of 2019 and no long-term debt. This puts it in a favorable position to pursue growth opportunities—and to reach profitability in due time. Most analysts see it rounding the profit corner by next year.
In the third quarter DraftKings reported better than expected revenue of $133 million that nearly doubled from the year prior. This was mostly the result of a sharp increase in the number of users. However, the reported net loss per share ($0.98) was well below the analyst consensus ($0.63) due to larger than expected player payouts.
After three quarters DraftKings had a $2.08 per share loss on revenue of $292 million, which was $100 million above the first three months of 2019. Management raised its full-year revenue guidance to $550 million at the midpoint which reflects growth of 27.5%. Based on its forecast for 2021, revenue growth is slated to accelerate to around 45%. Granted, reaching these targets will depend on pandemic related developments, but things are certainly looking up for this year.
What Can Drive Growth for DraftKings in 2021?
DraftKings is estimated to hold a greater than 50% share of the daily fantasy sports market and its platform still has plenty of room for growth. The popularity of peer-to-peer competitions is likely to gain a second wind as sports leagues return to full-season schedules. As this happens, it will be able to build off its user base of more than 4 million by offering new contests, products, and technology on a global scale.
Outside of its core fantasy sports business, DraftKings' biggest growth opportunities lie in mobile sports betting and iGaming. As states have legalized these activities, the company has been quick to enter. With about a quarter of the U.S. population residing in states where online gambling is permitted and regulatory momentum in several states, the runway for growth is long.
The opportunities for geographic expansion are particularly compelling. DraftKings already operates in 26 countries but has a lot of room to spread its wings in the $70 billion global sports betting market. With more nations moving to regulate sports betting, DraftKings is sitting on a gold mine.
What makes DraftKings a tricky play, however, is the company's exposure to hard top predict regulatory decisions. This makes the stock vulnerable to unfavorable legislation. And while winds have largely been blowing in DraftKings' favor of late, it is always one negative ruling away from a selloff. But for risk bearing investors willing to take this gamble, this stock holds some big payoff potential over the long-term.
Is it a Good Time to Buy DraftKings Stock?
What do sell side analysts think of DraftKings? Of the 28 analysts that cover the stock, not one has a sell rating and most call it a buy. Last week a pair of firms, Piper Sandler and Loop Capital Markets, slapped $100 price targets on the stock both citing prospects for the legalization of online sports betting in New York state as a major near-term catalyst.
From a technical perspective, DraftKings chart has exhibited a bullish pattern of higher highs and lows since being spawn from its SPAC in the spring of last year. Today, DraftKings stock is trading about 15% off its $64.19 October 2020 high. The stock looks likely reach a new high in 2021—and pending regulatory developments, could get there sooner rather than later.
So, overall DraftKings is indeed looking like royalty heading into the new year. It is in a great spot to build off the success of its fantasy sports offering and expand into sports betting and iGaming markets worldwide. Although new market entrants are emerging, it is going to be difficult for competitors to dethrone DraftKings.
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