Shares of DraftKings(NASDAQ: DKNG) rocketed to a 52-week high of $49.57 earlier this year on the back of strong growth in the online sports betting market. Recent concerns over regulatory headwinds have pulled the stock well off its highs, but Macquarie analyst Chad Beynon has an outperform (buy) rating on the shares with a $50 price target. Is the stock a buy now?
Why buy DraftKings stock
Illinois is the latest state to move to a higher tax rate on sports betting companies, which creates uncertainty about DraftKings' ability to reach its profit target next year.
DraftKings is having no problem growing revenue, which jumped 26% year over year last quarter, but Wall Street analysts expect the company to report an adjusted loss of $0.28 per share in 2024 While a loss, that is a significant improvement over the $1.73 loss last year.
DraftKings has been working to increase adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to between $900 million and $1 billion by 2025. Even with states moving to increase sports betting taxes, management believes it will hit that target. To offset the higher tax rates, it plans to roll out a gaming tax surcharge to customers in four states in 2025.
Importantly, momentum in customer growth reflects a strong brand and market presence that can offset near-term headwinds. Management anticipates a strong second half of the year after reporting an 80% year-over-year increase in new sports betting and iGaming customers last quarter. The online sports betting market is expected to be worth $24 billion by 2029, according to Statista, but recent momentum suggests the market could be larger than previous estimates.
It's for these reasons the stock remains a compelling investment opportunity. Another strong earnings report after the upcoming NFL season might be all it takes to send the stock back toward its highs.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
