DraftKings stock (DKNG) popped as much as 18% on Wednesday following a bullish call from a Morgan Stanley analyst.
The stock, which has struggled in recent months, settled up 5.2% on that day at $20.33 per share.
In a note titled “Too Big an Opportunity to Ignore,” Morgan Stanley analysts stated that while the broader markets haven’t favored gaming stocks to start 2022, DraftKings is one of the best-positioned companies in an industry with growth potential.
“While we and the market have been focused on near- to medium-term profit concerns, we believe at the current price ($19 per share), one should not ignore that DKNG is a leading market share player in what will be a very large profitable market,” Morgan Stanley analysts wrote.
Morgan Stanley upgraded the stock from equal weight to overweight and maintained a $31 price target. DraftKings will report its Q4 earnings on Feb. 18.
The Morgan Stanley note comes as mobile sports gambling has exploded during its first weeks in New York. New Yorkers placed $603 million worth of bets in less than two full weeks of legalized mobile gambling in the state, including a $134.4 million handle for DraftKings, according to data released by the New York State Gaming Commission.
“We increase our 2025 [Total Addressable Market] forecasts from $19B to $21B to reflect the strength we saw in NY in the first 8 days, much stronger than expected results released by MI, CT, and TN last week, and implications for future states,” the Morgan Stanley analysts noted.
At the same time, Wall Street analysts generally expect DraftKings to remain unprofitable until 2024, according to Bloomberg consensus data.
“We don’t have DraftKings achieving profitability until 2024,” Needham & Company’s Bernie McTernan said on Yahoo Finance Live (video above). “All these new state launches are a new market, they’ll go in like New York and invest a lot of money and acquire customers and hope those improve given the data last year.”
Part of the cost equation involves DraftKings and other sports betting platforms handing out free wagers via promotional deals to attract gamblers and paying state taxes on revenues.
New England Patriots cornerback Stephon Gilmore stands in front of a DraftKings sign during a practice session in Foxborough, MA on Oct. 22, 2020. (Photo by Barry Chin/The Boston Globe via Getty Images)
Kelly, whose firm predicts DraftKings will turn a profit in 2025, believes the company is well-positioned amid growing betting handles nationwide and potential industry innovation.
“I think what you’re looking at is a start of a new age of fan interactivity, and I think digital companies like DraftKings and Flutter’s FanDuel ($PDYPY) are going to be leading fan interactivity, fan engagement,” Kelly said on Yahoo Finance Live recently. “Right now we’re in a period where high beta industries are out of vogue. But I think [if] you look at DraftKings, their vertical tech stack, what they’re building, I think these are compelling platforms that the leagues are behind…You look at the growth that we’ve seen in the U.K., we’re about 15 years behind them. We think it could be a huge industry.”
According to Kelly, sports gambling is likely to move forward with an immersive multimedia approach. DraftKings began this process in 2021 through a deal with Dish Network that allows bettors to track their wagers while watching live sports events all on one platform.
Kelly added that college students coming into the gambling market through legalized sports wagering, rather than the previous illegal market entrants, could be a potential boon to the industry through further legalization among states. (The three largest states by population size haven’t yet legalized mobile sports betting.)
DraftKings has also aggressively pushed into media through its own channels. In July, it launched an NFT product with Autograph, an NFT company co-founded by Tom Brady, and was rumored to be in talks with The Athletic before the New York Times purchased the sports media outlet.
“If you watch what DraftKings is trying to build around NFTs, what they could potentially be doing around media, these are higher-margin businesses where they cross sell other products into,” Kelly said. “So I think if they could get into higher-margin businesses around their cross selling, that could boost profitability, but you’re going to see continued losses [for now),That’s just the environment we’re in.”
Josh is a producer for Yahoo Finance.