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Why DraftKings Stock Is a Winner Today

What happened

Investors in DraftKings (NASDAQ: DKNG) are flush with profits Wednesday morning. Shares of the online sports betting company are up a stellar 13.7% as of 11:20 a.m. ET.

And you can thank Morgan Stanley for that.

Image source: Getty Images.

So what

This morning, Morgan Stanley upgraded shares of DraftKings from equal weight (i.e., hold) to overweight (i.e., buy), with a $31 price target that implies DraftKings stock could rise another 41% this year, reports StreetInsider.com.

"We forecast legal US sports betting & iGaming to increase from <$1.5B in 2019 to $20.6B in 2025 as more states legalize and spend per capita rises," explains the analyst. And as the market grows, DraftKings should be able to maintain and even grow its share of this business, achieving 24% market share in online sports betting, and its 21% share of iGaming.

It only takes a little quick calculator work to see that this works out to a minimum of $4.3 billion in revenue for DraftKings -- growing its current $1.1 billion in annual revenue by roughly four times in three years.

Now what

Now granted, DraftKings isn't currently earning any profit on its revenue, and Morgan Stanley admits that this is a worry for the stock. But the analyst points out that in foreign markets where online gambling has been legal for a longer period of time, operators earn 25% to 30% profits on their revenue.

From this, the analyst concludes that DraftKings could earn more than $1 billion a year if it grows as fast as Morgan Stanley thinks probable -- and earns the profit margins that Morgan Stanley thinks possible.

Although the analyst admits that there are "downside risks" if it turns out to be wrong, the prospect of owning an online gambler for less than 12 times 2025 earnings, with growth rates in excess of 100% a year, look sufficiently attractive to win DraftKings a buy rating from Morgan Stanley.

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Rich Smith 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.


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