Although it’s been gradual, DraftKings (NASDAQ: DKNG) stock holds potential for growth from its current standing, particularly considering its robust DraftKings Predictions division.
In a client note dated July 9, Deutsche Bank analyst Steven Pizzella adjusted his price target on the gaming stock to $28 from the previous $26 while maintaining a “hold” rating. The analyst pointed out sluggish revenues in the operator’s iGaming and online sports betting segments, predicting that DraftKings will report second-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) of $140 million—falling short of the bank’s earlier estimate of $246 million and Wall Street’s consensus of $198 million.
“This revision primarily reflects lower expectations for OSB and iCasino revenues, alongside rising marketing expenses,” Pizzella remarked. “We have revised OSB net revenue estimates to $884 million from $968 million, influenced by a reduced hold estimate (10.5% compared to the earlier 11.0%) and increased promotional costs.”
For DraftKings’ iGaming revenues in the June quarter, his forecast stands at $446 million, again below the consensus estimate of $469 million. The company is scheduled to reveal its second-quarter results on August 5.
Growth Potential in Prediction Markets for DraftKings
While DraftKings stock has faced challenges recently, this may stem from the market overlooking the advantages stemming from the DraftKings Predictions segment, especially with events like the World Cup on the horizon. The company has recently launched its DKeX exchange, enhancing its control over event contract economics.
Pizzella noted that his previous assessment of DraftKings’ predictions market initiative was mainly concentrated on anticipated spending of $200 million to $300 million by 2026, but he has “revised” his outlook to consider the upside potential of this business. The analyst suggests that while it’s currently more subjective than objective, the take rate from the prediction market could be significant in estimating that segment’s contribution to DraftKings’ share value.
“We can apply take-rate projections to estimate net revenues, ranging from 3.0% in a pessimistic scenario to 6.0% in an optimistic one, which is below DKNG’s expected OSB net win margin of 7.1% by 2025,” Pizzella comments. “This discount is justified as prediction markets operate more like exchanges rather than sportsbooks, offering heightened price transparency, narrower bid/ask spreads, reduced structural hold, and potentially increased user price sensitivity. Furthermore, achieving the higher end of projections hinges on establishing significant scale in the market-making business, in our assessment.”
In the realm of prediction markets, DraftKings encounters fierce competition from established players like Kalshi and Polymarket. However, some analysts believe that DraftKings is well-equipped for the challenge, given that its expertise in sports trading translates effectively to prediction market trading and market-making. Pizzella’s revised price target for the gaming stock suggests it “might trade at a 6.3% free cash flow yield based on our forecast for free cash flow per share in 2027.”
Understanding the Handle Decline
Data at the state level indicates that DraftKings’ sports betting handle decreased by 2% year-over-year in May. This decline may be attributed to various factors, including competitive pressures from prediction markets, hinting that DraftKings should strengthen its presence in that arena.
Pizzella indicates that additional reasons for the handle decline include a growing popularity among bettors for parlays, which typically result in smaller bet sizes, as well as certain sports, like college basketball, being more favorable for prediction market platforms.
Nonetheless, some prominent investors recognize the value in DraftKings, suggesting that the stock could gain traction if competitors like Kalshi and Polymarket face legal and regulatory challenges.