JPMorgan, a prominent financial institution, announced on Tuesday its decision to upgrade shares of the online gambling giant, DraftKings (DKNG), from Hold to Buy, concurrently elevating its price target from $26 to $37. This move underscores JPMorgan’s confidence in the company’s potential, which, it asserts, has been inadequately reflected in its stock performance relative to the S&P 500 Index (^SPX) since July.
While the stock demonstrated an encouraging nearly 4% surge in pre-market trading, JPMorgan’s research note offers valuable insights into the factors contributing to DraftKings’ lagging performance and outlines its strategic trajectory moving forward. Notably, JPMorgan analyst Joseph Greff posits a compelling theory that customer acquisition costs are poised to witness a continued downturn as the company attains national scale and sees reductions in sales and marketing expenses.
One of DraftKings’ pivotal achievements in recent quarters has been the commendable increase in gross gaming revenue market share, surging from 28% in the first quarter to an impressive 32% in the second quarter. This upswing can be attributed in part to the company’s enhanced precision in odds making, coupled with a discernible shift by customers towards more lucrative betting options.
Furthermore, Greff contends that DraftKings possesses a formidable competitive edge, characterized by a robust combination of product quality, expansive scale, and a strong brand presence. This assertion aligns with insights gleaned from a 2022 Wall Street Journal article on the competitive landscape for customer acquisition.
In the lead-up to July, DraftKings’ stock catapulted by an extraordinary 175% over the year, propelled by heightened optimism on Wall Street, driven by gains in market share. However, the emergence of two formidable contenders, Penn Entertainment (PENN) and Fanatics, has injected a measure of uncertainty into the company’s future prospects.
Despite this new competitive landscape, JPMorgan remains sanguine about DraftKings’ resilience, asserting that the company is well-positioned to hold its ground against these fresh challengers. Of particular note is DraftKings’ forward-looking projection of attaining its inaugural full year of profitability in 2024, which augurs well for its long-term viability.
In summation, the research note of JPMorgan furnishes a comprehensive rationale for its decision to upgrade DraftKings’ shares, shedding light on the potential implications for investors. The extent to which the stock will ascend to meet the upgraded price target set forth by the firm remains an open question, but the upgraded rating underscores the belief in DraftKings’ underlying strength and potential for sustained growth.
Source: Yahoo Finance
