In the span of over four years since DraftKings (NASDAQ: DKNG) began trading as a standalone public entity, occasions where the stock has been deemed affordable have been rare. In fact, such instances might be non-existent, yet one analyst sees a promising valuation in the online sports betting behemoth’s shares.
In a recent client report, Macquarie analyst Chad Beynon described DraftKings as “one of the best bargains among high-growth companies.” This optimistic assessment followed the gaming company’s decision to lower its fourth-quarter guidance last week, causing a temporary dip in the stock’s value. However, the shares quickly rebounded, climbing 7.68% on a trading volume that was more than double the daily average, supported by bullish analyst recommendations.
A significant part of the subdued outlook for the current quarter stemmed from a low NFL hold in October, which allowed bettors to edge out some victories against the house. Despite this, Beynon foresees a reduction in DraftKings’ earnings volatility moving forward.
“Going forward, however, management expects much lower relative earnings before interest, taxes, depreciation, and amortization (EBITDA) swings from short-term hold as EBITDA becomes a larger percentage of revenues (30% target), minimizing the magnitude of flow-through,” wrote the analyst. “Management still expects structural hold of 10.5% this year (10% actual hold), with structural hold increasing to 11% in 2025.”
Beynon reaffirmed an “outperform” rating for the stock, increasing his price target to $51 from $50, suggesting an 18% upside from the current closing price.
One of the primary reasons behind this positive valuation is DraftKings’ adeptness in generating free cash flow (FCF), setting it apart from other high-growth contenders. Compared to competitors, the stock appears somewhat discounted based on rising free cash flow expectations. This proficiency is particularly noteworthy as many growth companies either struggle with profitability or haven’t begun to accumulate free cash yet.
“Management also expects $850 million of free cash flow in 2025, representing an FCF conversion rate of 89%. Based on current 2026 consensus, this would imply an FCF yield of about 7%, making it one of the best bargains among high-growth companies, in our view,” added Beynon.
Should DraftKings meet or exceed the $850 million free cash flow forecast next year, it could boast one of the best rates among all online gaming companies. This expansion in free cash flow could enable the company to return capital to shareholders, including augmenting a previously declared $1 billion share buyback plan.
Although traditional valuation metrics don’t paint DraftKings as inexpensive, with the shares trading at 75.55x forward earnings and 19.56x book value, it still holds significant growth potential. The company has solidified its position as a leader in the fast-growing U.S. online gaming industry and, having transitioned to profitability, is well-poised for double-digit revenue growth.
In conclusion, Macquarie’s Chad Beynon remains confident in DraftKings’ capabilities and future growth, reinforcing the stock’s compelling valuation despite its lofty metrics.
