Investors weren't overly impressed by DraftKings' (NASDAQ: DKNG) first-quarter earnings report last week, selling off the stock by about 3% Friday even after the sports gambling company reported 53% Q1 sales growth, and raised sales guidance through the rest of the year.
But they appear to be having a rethink.
Since selling off Friday, DraftKings stock has won back all its losses, and even a bit more. Part of the reason for this may be the positive assessment Citigroup analyst Steven Sheeckutz gave on DraftKings' report: He thinks DraftKings stock is a buy... and predicts it will hit $57 within a year. It closed Friday just below $42.
Is DraftKings stock a buy?
Sheeckutz calls DraftKings a first-mover in online betting, and argues the company is an innovator in this growing market, with the scale to outperform. These are debatable points. Last year, DraftKings reportedly overtook privately held FanDuel in overall market share -- 31% to 30%. But an update on LegalSportsReport in March put FanDuel's revenue growth at 56% versus the 53% that DraftKings just reported -- suggesting FanDuel may have retaken the lead.
Worst case, though, it's probably safe to say the two companies are neck-and-neck -- and both businesses are growing strongly. With DraftKings stock slumping recently, Sheeckutz predicts the company may decide it's time to buy back some of its fast-growing stock while it's relatively cheap.
But would that really be wise, and should you buy DraftKings stock, too?
I'm not so sure you should. It's not just that DraftKings isn't yet profitable on an unadjusted GAAP basis. The company generates positive free cash flow, and most analysts agree 2024 will be the year DraftKings does earn its first profit. What worries me more is that, at $21 billion in market capitalization, DraftKings shares sell for more than 180 times trailing free cash flow. That's a lot of money to pay -- even for a stock growing at 50-plus percent.
Factor in competition from FanDuel, which could both slow growth and squeeze profit margins, and I see more risk than reward in DraftKings stock today.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
