05/06/24 01:30 PM EDT

We Remain Bullish on DraftKings $DKNG

Sean Jenkins

Our Gaming, Lodging & Leisure (GLL) research team added DraftKings (DKNG) to its Best Idea long list on 9/29/22. The stock is up approximately 200% since. Below is an excerpt from a new research note from our GLL analyst Sean Jenkins. If you'd like to receive/learn more about Sean's research click here.

DKNG | ADDITIONAL THOUGHTS POST-Q1

Following the solid print and guidance increase, we published our detailed thoughts on DKNG ahead of the conference call. Following the conference call, we came away from the quarter even more positive, although there was very little follow through in the stock. Over the weekend and on Friday we exchanged thoughts with some clients and mostly discussed how the bear case these days is overly 2^nd derivative focused and regulatory focused (tax hikes, betting type crackdowns). On the 2^nd derivative, we get it. Revenue growth is set to slow in Q2… but then reaccelerate in Q3-Q4… So not a great reason to sell the stock.

Also, at the same time the flow-through rate to EBITDA is improving, EBITDA estimates are tracking higher, and so is FCF (bigger deal). Moving on from the name due to one quarter of top line deceleration despite an expected compound growth rate >20% on the top line through ’26 and MUCH higher growth on the EBITDA line is a tough pitch in our view.

As for the regulatory side of things, we do see the risks with potential tax hikes down the line, but that’s a lot tougher to track and predict. We also think that such a risk is more than reflected in the stocks right now. DKNG’s stock has done well, but so have the fundamentals, and we’d argue the fundamentals have outperformed the stock, especially amid this ~15% drawdown from the highs.

We’re already bullish on the name and sector and have been for a long time now, but for the immediate term we’re looking for April data to provide some clues on whether there’s upside to Q2 results and thus ’24 guidance. April might have been in the books at the time of guidance last week, but DKNG is usually conservative about the quarter ahead and we think they gave themselves some wiggle room given where estimates sit.

In our view, if April nicely accelerates from March like we’re seeing in NY, we think there’s upside to the quarter provided 1H of May (seasonally bigger contributor) doesn’t face any material hold % swings. Judging by the weekly data out of NY, we already see Q2 tracking ahead of our baseline expectations.