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DraftKings (NASDAQ:DKNG) ranks as one of Wednesday’s best-performing gaming equities. It rose on hopes that an upgrade from Morgan Stanley analyst Thomas Allen marks an end to a long-running slide for the online sportsbook operator.
In a note to clients today, Allen boosts his DraftKings rating to “overweight” from “equal weight” while maintaining a $31 price target on the stock. That implies upside of 60 percent from the Jan. 25 close.
On the back of Allen’s call, DraftKings is higher by almost 12 percent in midday trading on volume that’s more than triple the daily average. That puts the stock on pace for its best intraday performance since September 2020.
While acknowledging DraftKings still isn’t profitable, Allen points to New York as evidence there’s still something to the sports betting investment story.
[New York] results on Friday remind us that the US sports betting/iGaming market is likely to be very large, with only a handful of market share winners. We expect DKNG to be one of them, and with sentiment at an all-time low on near-term loss concerns, we see now as a good time to invest for the long term,” Allen said in the note.
DraftKings got another lift with the Arizona Department of Gaming reporting November sports betting statistics. The operator has a 31.9 percent share of that fast-growing market, putting it ahead of all its rivals.
For DraftKings, It’s a Start
Allen’s commentary on DraftKings likely comes as a relief to beleaguered investors in the slumping stock.
Entering today, the shares were already down 29.67 percent year-to-date, and almost 72 percent below the 52-week high. Prior to the Morgan Stanley call on the stock, analyst sentiment on DraftKings to start 2022 was mostly dour. That’s with the shares faltering amid analyst price target cuts and as investors grow increasingly antsy about the timeline to profitability.
Investors also expressed concern about the broad landscape of sportsbook operators in the US and the resources required to get ahead in that field. For its part, DraftKings is a big spender on promotions to lure new clients. However, Allen notes the competitive arena already shows signs of thinning, and that’s to DraftKings’ benefit.
“Currently in every state that releases market share data, the top 5 operators have at least 82 percent combined share. Though there is a lot negative written about the levels of marketing and promotional spending, this has driven a very concentrated market that only players of scale can really compete in,” notes Allen.
Don’t Ignore DraftKings
Profitability remains a prime investor concern. But amid the aforementioned slide, DraftKings stock may be residing at levels that are too compelling to ignore.
While we and the market have been focused on near to medium-term profit concerns, we believe at the current price, one should not ignore that DKNG is a leading market share player in what will be a very large, profitable market,” Allen added.
If the stock can build on today’s momentum, it’s possible short sellers that battered the stock last year could be forced to cover part of their positions, potentially fanning the flames of a rally.
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