DraftKings Stock Rises 14% in a Month: Time to Buy or Wait for a Dip?

Shares of DraftKings Inc. DKNG showcased outstanding performance in the past month, significantly outperforming the Zacks Gaming industry and the S&P 500. The company is benefiting from an increase in new online sportsbook and iGaming customers as well as improved product offerings.

In the past month, DKNG stock moved up 13.6% compared with the industry's 6.7% gain and the S&P 500's 2.1% increase. As of Monday, the stock closed at $39.20, below its 52-week high of $49.57 but well above its 52-week low of $25.73.

In the same timeframe, the company also outperformed other major industry players. Shares of Flutter Entertainment plc FLUT, Caesars Entertainment, Inc. CZR and MGM Resorts International MGM rose 11.7%, 10.9% and 4%, respectively.

Stock Performance

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Technical indicators suggest continued strong performance for DKNG. The stock is trading above its 50-day moving averages, signaling robust upward momentum and price stability. This technical strength underscores positive market sentiment and confidence in DKNG's financial health and prospects.

50-Day Moving Averages

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Reasons Behind DKNG's Upsurge

DraftKings stock surged in recent trading sessions, largely driven by Flutter Entertainment's optimistic guidance. Both companies dominate the online sports betting and iGaming landscape, and Flutter's positive outlook has sparked heightened enthusiasm across the sector. Investors are rallying behind DraftKings as market sentiment turns bullish, fueled by confidence in the industry's trajectory.

During second-quarter 2024, DraftKings registered an 80% year-over-year increase in new online sportsbook and iGaming customers, which is a significant boost considering no state launches during the period. The company expects the strong pace of customer acquisition to persist throughout the second half of the year and potentially extend further. This suggests that the U.S. online gaming market could be even bigger than initially anticipated.

DKNG is also benefiting from a decrease in customer acquisition costs. It is expected to gain from the launch of new features for its sportsbook, such as in-house player props and broader progressive parlays. iGaming is also expanding with more new games released compared to last year.

The company expects to achieve between $900 million and $1 billion in adjusted EBITDA in fiscal 2025. This highlights confidence in future profitability. With its aggressive expansion, product diversification and focus on responsible gaming, DKNG is poised to capitalize on the surging demand for online gambling and sports betting, solidifying its position as a market leader in the rapidly evolving industry.

DraftKings' product is well-positioned as it continues to stand out by investing in new features and functionality for Sportsbook and iGaming. In Sportsbook, the company recently introduced in-house player prop bets for major leagues like the NFL, NBA, MLB and NHL, along with college football, basketball and tennis. DKNG also expanded its progressive parlays to include spread and total wagers. Looking ahead, the company is planning to roll out a bet-and-watch feature that will integrate NFL streaming.

DKNG Trading at a Premium

The company is currently valued at a premium compared with the industry on a forward 12-month P/S basis. DKNG's forward 12-month price-to-sales ratio stands at 5.79, higher than the industry's ratio of 2.95 and the S&P 500's 5.22.

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What Might Hurt DKNG?

High costs are likely to hurt the company's margin. In 2024, sales and marketing expenses are expected to increase mid-to-high single digits year over year, mainly due to the Jackpocket acquisition, which could dent near-term profits. Increased customer acquisition, which might be beneficial in the long term, led to higher marketing and promotional costs, creating a drag on adjusted EBITDA in the short term.

End Notes

DraftKings stock has performed exceptionally well in the past month. This surge can be attributed to increased customers in its online sportsbook and iGaming platforms, along with expanded product offerings, such as in-house player prop bets and broader progressive parlays. The company's technical indicators show strong momentum. It also benefits from lower customer acquisition costs and expects continued growth in the U.S. online gaming market.

Despite the company's strong performance and growth potential, rising marketing and promotional costs, especially after the Jackpocket acquisition, may adversely impact short-term profitability. While long-term growth prospects remain solid, the near-term financial pressures suggest that current investors should retain the stock. Still, potential new buyers should wait due to near-term cost pressures and premium valuation.

DKNG carries a Zacks Rank #3 (Hold) at present.

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