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DraftKings Shares Surge As Bank Of America Calls It A ‘KIng’

Bank upgrades DraftKings, predicts significant improvement in margins and profitability.

Shares of DraftKings Inc (NASDAQ:DKNG) are seeing a lift on Wednesday after Bank of America Corp (NYSE:BAC) Global Securities called the stock a “king.”

It’s time for the sports-betting giant to “take the throne,” the firm said. Here’s what investors need to know.

Shaun Kelley upgraded DraftKings from a Neutral to a Buy rating, and increased the price target from $26 to $32, suggesting that the company’s product and revenue momentum are nearing a critical point, which may lead to a significant improvement in margins and profitability.

The upgrade comes alongside a BofA report, highlighting that DraftKings has outperformed in 2023 and could continue to capture market share, contributing to near-term top-line revisions. Moreover, cost leverage could lead to larger adjustments in adjusted EBITDA and margins than initially expected.

BofA’s new EBITDA estimate for DraftKings for 2025 is 17% above the consensus, with an additional 15%-25% upside (to $800-$875M) potentially on the cards.

Online gaming and DraftKings have both performed beyond expectations, according to BofA. The market is anticipated to grow about 35% year-over-year in 2023, with a 15% CAGR from 2023-2027.

Las Vegas Mayor Carolyn Goodman, DraftKings Chief People Officer Graham Walters, and DraftKings employees attend the DraftKings Las Vegas headquarters ribbon cutting on March 22, 2023, in Las Vegas, Nevada. (DENISE TRUSCELLO/GETTY)

DraftKings’ yearly revenue growth from 2023 to 2025 is projected to outpace the market, Kelley said. That’s primarily driven by substantial product and mix improvements.

DraftKings grew its market share in online sports betting from roughly 21% to around 29% in the past year, driving cross-sell to iGaming where share has increased from 22% to 26% — bullish momentum that should continue, the analyst said.

DraftKings is at a key cost inflection point with growth in cost of revenue and external marketing peaking. BofA anticipates that cost leverage will speed up due to falling promotions in mature state vintages, improving gross margins with higher hold and lower promos, and slowing external marketing spend given lower acquisition costs and improved efficiency.

Despite trading at 20.5x its estimated 2025 adjusted EBITDA, which is above “proven best of breed disruptors” at 17.5x, BofA justified the premium on DraftKings as it offers nearly double the top-line growth of those same proven disruptors from 2023 to 2025.

Kelley said that idiosyncratic growth stories are hard to find in Gaming, Lodging and Leisure, and consumer discretionary, while DraftKings appears set to defy macro headwinds and decelerating trends for 2023, 2024, and 2025.

Shares of DraftKings are trading 7.01% higher Wednesday to $30.99, according to Benzinga.

Produced in association with Benzinga

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