DraftKings Lauded by Previously Bearish Research Firm

Posted on: September 29, 2022, 04:33h. 

Last updated on: September 30, 2022, 03:54h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings’ (NASDAQ: DKNG) stock was endorsed today by Hedgeye — a research firm that was previously overtly bearish on the gaming company’s shares.

DraftKings stock
Hedgeye gaming and leisure analyst Todd Jordan, seen on a televised program, above. He issued a bullish report today on DraftKings stock. (Image: Hedgeye)

In a note to clients on Thursday, Hedgeye analysts Todd Jordan and Sean Jenkins highlight favorable fundamentals for DraftKings, including rising same-state revenue and a more restrained promotional spending environment.

Same state revenues are re-accelerating and the new state outlook is as bright as ever,” noted the analysts. “The promotional and external marketing environment looks a little less aggressive than last year with Caesars scaling back and Wynn Resorts essentially pulling out. DKNG over indexes to football so the timing is right for further sequential market share gains.”

Hedgeye added DraftKings stock as a new best idea long. But the shares slipped 3.46% on below-average volume Thursday. That’s as travel and leisure stocks of all stripes, including gaming names, slid amid fears the Federal Reserve will continue its aggressive rate-hiking posture through year-end and into 2023.

Hedgeye Reverses Course on DraftKings

As noted above, DraftKings closed lower Thursday, and while 29 analysts cover the stock, Hedgeye’s fresh outlook on the name is notable.

In January 2021, the research firm issued a scathing report on the gaming company. That document highlighted the stock as a valid short idea on the basis of an “obscene” valuation, a long road to profitability, and eroding market share.

Plenty of traders took that advice, as DraftKings has been a favorite target of short sellers in its brief time as a freestanding public company. Kynikos Associates founder Jim Chanos — one of Wall Street’s most respected short sellers — is short DraftKings, and previously lambasted the company’s money-losing business model.

Short interest in the sportsbook operator’s shares hovers around 10%, according to Seeking Alpha data.

Why Hedgeye DraftKings View Could be Validated

There’s no getting around the fact that most gaming stocks are faltering this year. DraftKings is a notable culprit, with a 2022 decline of 42.19%. But, Hedgeye’s bullish view on the shares has merit.

Through the first three weeks of the NFL season, sportsbook operators’ hold — what’s retained after paying out winning bets — has been mostly solid. Additionally, the calendar is favorable for the industry, as 14 weeks remain in the NFL season, and the NBA regular season commences on October 18. Football and basketball are the two most wagered-on sports in the US.

Integral to any bullish thesis on DraftKings — and any other sportsbook operator’s shares, for that matter — is the issue of promotional spending. Broadly speaking, there’s evidence that gaming companies are displaying restraint on this front. But the third week of the NFL season also brought some examples of operators, including FanDuel and Rush Street Interactive (NYSE: RSI), boosting promotional expenditures in a bid to lure more new clients.