DraftKings' (NASDAQ: DKNG) quality business and healthy outlook are why the recent stock price correction was a buy-the-dip opportunity. The market had cause to correct; Illinois raising taxes on gaming companies is not a positive for the margin, but other factors, including AI, offset it. DraftKings is well-positioned to benefit from the so-called third wave of AI, centered on productivity gains and digitally operated businesses.
AI is a four-pronged tool for leveraging the gaming industry's earnings potential. AI can help with cybersecurity issues, keeping the entire operation safer. AI can also help reduce fraud and cheating, maximize promotional activity, and automate business functions like customer service. Automation also includes setting odds and risk management, which are among the leading drivers of hold rates and profitability. Regarding DraftKings and AI, analysts view it as an industry leader. Morgan Stanley says DraftKings is ahead of its peers because it has used machine learning and incorporated AI into its high-margin businesses for years. Now, DraftKings plans to make AI a central theme in its operations.
Analysts Are Leading DraftKings to a New High
The improving outlook for DraftKings to expand its territory, deepen its market penetration, and maximize operations leads analysts to raise the sentiment and ratings for the stock this year. MarketBeat tracks 29 analysts with high conviction in their Moderate Buy rating and $49 consensus price target. The consensus implies a 20% upside for this market but is led higher by the revisions. Consensus is up 50% in the last year, with the range of fresh targets narrowing into the $50 to $60 range. That’s good for a nearly 50% upside at the high end, and estimates will likely continue to rise as the year progresses.
Among the latest revisions is an update to Morgan Stanley's revenue and earnings outlook. The firm upgraded based on notable catalysts, including recent quarterly results and guidance. Free cash flow is expected to inflect and turn positive, providing a more straightforward pathway to sustainability, and the risk of new tax legislation is limited. There is a risk that other states will follow Illinois’ lead, but nothing is on the table for this year. If New Jersey fails to include higher taxes in its June budget proposal, it is unlikely that there will be increased state-level taxation until 2025 or later.
DraftKings' next earnings release is due August 1st and will likely catalyze the market. The analysts expect top-line growth of 25% and profits versus losses, but the bar is set low, and outperformance is expected. The revision trend is lower despite the update from Morgan Stanley, which sets the company up to outperform.
DraftKings Isn’t Gambling on Growth
DraftKings isn’t relying on organic growth and has made several critical acquisitions that expand its offerings, grow its market, and increase cross-selling opportunities. The latest target is Simplebet, a small sports book targeting micro-markets, of which DraftKings is an early investor. The company owns about 15% of the stock and may announce a complete takeover with the Q2 earnings release. Simplebet is already available on DraftKings and other sports book platforms; the deal is expected to give DKNG 100% control and increase its exposure to in-game betting and other micro-markets. Regarding Simplebet’s business, the company recently reported that its wagering volume has more than doubled since this year’s MLB season started.
DraftKings' recent correction resulted in a textbook buy-the-dip signal. The market fell nearly 15% on the news that Illinois would raise taxes, broke below critical support, but quickly rebounded to confirm support at a cluster of moving averages. The moving averages include the 30- and 150-day EMAs coinciding with the critical support target at $40.50. With this signal, traders and investors might expect the market to rebound and retest the $50 level soon. The $50 level is the critical resistance target; a move above it would open the door to a larger rally that may exceed the high end of the analysts’ target range.
