Online sports gaming company DraftKings is almost a pure-play investment on U.S. legal sports betting and iGaming growth, according to Morgan Stanley.
Note: DraftKings merged with special purpose acquisition company Diamond Eagle DKNG and the stock started to trade last Friday.
The Diamond Eagle Analyst
Thomas Allen initiated coverage of Diamond Eagle DKNG with an Overweight rating and $23 price target.
The Diamond Eagle Thesis
The legal online sports and gambling market in the U.S. remains in the very early stages but as new states legalize the market, total revenue should rise eight-fold from less than $1.5 billion in 2019 to $12 billion in 2025.
Allen said the assumption is based on an average spend per adult of $40, which is a discount to more developed markets like the United Kingdom and Australia. DraftKings is likely to command a 20% market share of the sports betting category and 15% of online gambling.
DraftKings is backed by more than $500 million of net cash, which is further strengthened by national advertising. By comparison, many of DraftKings' competitors are facing difficulties with their liquidity positions. As such, the company should become profitable in 2023, achieve EBITDA of $640 million in 2025, and $1 billion in 2028.
Unlike some of DraftKings' peers, the company has no brick-and-mortar presence or international regulatory risks, the analyst wrote in the note. This warrants a premium valuation given its direct exposure to the legal U.S. sports and gambling market.
DKNG Price Action
Shares of Diamond Eagle trade around $19.41.
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