Argus Research has issued a “Buy” rating on DraftKings Incorporated (NASDAQ: DKNG), increasing its price target from $40 to $50 as the company navigates through the expanding online sports betting market in the United States. DraftKings recently reported significant progress in user growth, as well as a reduced quarterly loss. With the legalization of sports betting in new states and an anticipated decline in customer acquisition costs, Argus projects that DraftKings will experience robust revenue growth, potentially becoming profitable in 2025. The research highlights revenue projections of $4.9 billion for 2024 and a potential 5-year earnings growth rate of 25% as the company capitalizes on new market opportunities.

Positive 2025 Guidance Despite Minor Adjustments

DraftKings presented a promising 2025 guidance, reflecting the expansion of sports betting to new states. The company anticipates revenue to reach $4.9 billion in 2024, a slight downgrade from previous estimates of $5.1 billion, primarily due to regional market dynamics. However, this modest adjustment is offset by the company’s stronghold in customer retention and growth in market share, positioning DraftKings for sustained upward momentum.

Q3 Performance: A Step Towards Profitability

Reduced Losses and Increased Revenue
DraftKings reported a $0.17 per-share loss in Q3, an improvement from the $0.35 per-share loss in the same quarter the previous year. Revenue rose 39% year-over-year, reaching nearly $1.1 billion, though just short of the $1.11 billion consensus. This increase in revenue was fueled by DraftKings’ entrance into new markets and its acquisition of Jackpocket. Adjusted EBITDA came in at a negative $58.5 million, outperforming analysts' expectations of negative $71.1 million.

Annual Revenue and EBITDA Forecasts
For 2024, DraftKings forecasts revenue between $4.85 billion and $4.95 billion, with adjusted EBITDA expected to range between $240 million and $280 million. This outlook assumes the stability of the professional sports calendar, reinforcing DraftKings' growth trajectory through 2024 and beyond.

Growth Strategy: Capitalizing on Acquisitions and Market Expansion

DraftKings has embraced a growth-by-acquisition strategy, having acquired both Sports IQ and Jackpocket in 2024. These acquisitions have bolstered DraftKings' offerings and expanded its customer base. The company’s B2C business, which includes daily fantasy sports, Sportsbook, and iGaming, allows for streamlined user engagement, offering customers a single account, wallet, and payment system. As DraftKings scales this segment, analysts anticipate market share gains and increased user retention.

Financial Health: Steady Progress with Room for Improvement

Medium Financial Strength Rating
Argus has assigned a Medium financial strength rating to DraftKings, reflecting a balanced debt profile and sufficient liquidity. At the close of Q3 2024, DraftKings held $878 million in cash, down from $1.27 billion at the end of 2023. Total liabilities slightly increased to $3.2 billion, emphasizing the importance of disciplined cash management as DraftKings seeks profitability.

No Dividend Payout
DraftKings has yet to announce any dividends, given its focus on reinvestment for growth. The company’s cash flow remains directed toward user acquisition, platform development, and geographic expansion in alignment with long-term profitability goals.

Management Team and Risks

Experienced Leadership
DraftKings’ management team, led by CEO Jason Robins and CFO Alan Ellingson, brings extensive experience in digital gaming. Robins and President Matt Kalish co-founded the company in 2012, and together they have driven DraftKings’ evolution as a premier platform for fantasy sports and betting.

Risks Involving Regulatory Shifts and Competitive Landscape
Key risks to DraftKings’ growth include regulatory changes, shifts in consumer behavior, and competition from both established players and new entrants. In addition, as DraftKings scales its operations, managing betting risk and enhancing its technology will remain pivotal challenges.

Investment Thesis: Pathway to Profitability by 2025

Revenue and EPS Projections
Argus projects that DraftKings will generate $6.2 billion to $6.6 billion in revenue by 2025, with adjusted EBITDA reaching $900 million to $1 billion. This growth trajectory aligns with DraftKings’ focus on expanding into additional states and optimizing customer acquisition costs. Argus maintains its 2025 EPS estimate at $0.88 per share and anticipates DraftKings achieving profitability in 2025, setting the stage for long-term earnings growth.

Five-Year Growth Rate
Once profitable, DraftKings is expected to achieve a 25% annual earnings growth rate over the next five years. This ambitious growth rate is underpinned by the company’s strong market position, effective user engagement strategies, and expanding product portfolio.

Valuation and Target Price

Valuation at Discounted Price-to-Sales Multiple
Given DraftKings' unprofitability, Argus employs a price-to-sales valuation, currently trading at 3.2x sales, compared to an average of 7x for similar high-growth digital companies. This discount underscores DraftKings’ growth potential, as Argus raises its price target to $50. With shares recently closing at $41.71, this target reflects a bullish outlook based on DraftKings’ continued market expansion and improving financial metrics.

Sector and Peer Comparisons

Competitive Positioning
Compared to its peers, DraftKings remains an attractive high-growth stock within the consumer discretionary sector. The company’s robust growth metrics stand out relative to competitors, and its strategic acquisitions have further solidified its position in the online gaming industry.

Conclusion and Disclaimer

Argus Research recommends DraftKings as a Buy with a revised price target of $50, backed by DraftKings’ growth strategy, anticipated profitability, and expanding market presence. Investors seeking exposure to digital gaming and sports betting may find DraftKings an appealing option, particularly given its competitive positioning and long-term earnings potential.