There's no denying online sports-betting platform DraftKings(NASDAQ: DKNG) has come a long way since launching as a fantasy sports site back in 2012. Chief among these changes? The rollout of wagering on sporting events, which was officially legalized in the United States by the Supreme Court's 2018 decision to strike down a long-standing ban on sports-based betting.
Now five years removed from that sea change, the luster has worn off. The market's getting a bit crowded too. Rival site FanDuel is also in the sports wagering business, while entertainment titan Walt Disney is lending its ESPN brand name to Penn Entertainment to establish yet another means of placing bets on sports. A handful of casinos are also already in the business, of course, including with their own online offerings.
Given all of this, it would be easy to assume DraftKings' best days are all in the past. And, perhaps they are. However, there's still a great deal of upside potential from this stock left to tap into.
A tailwind is blowing in DraftKings' direction
It's tricky. Investors understand there are limits to how much business a company can feasibly do. For all intents and purposes, though, investors (not to mention analysts) are flying blind in terms of figuring out how far this company can go before hitting a growth wall. Further muddying these waters is stiff competition and the sheer newness of the business itself.
Realistically, though, DraftKings isn't as near this limit as the market seems to think it is.
An outlook from Straits Research puts the company's likely potential in perspective. The market research outfit believes the global sports betting market is on pace to expand by nearly 14% per year through 2031. Asia is expected to lead this growth, but DraftKings' United States market should do rather well too. Vixio predicts that domestic sports betting revenue will roughly double between now and 2027, with nearly all of that growth being driven by online sports betting platforms like DraftKings.
The driver of this growth isn't just more and better marketing from online and offline sports books, though. It's the ongoing legalization of the business.
Although sports betting is no longer federally banned, that doesn't make it legal everywhere. Individual states still make that call. As of the latest count, 30 U.S. states permit sports betting of some sort. That leaves another 20 states with the potential to legalize the business in the future; efforts are underway to make it happen in most of them.
Notably, California and Texas have yet to pass any measures that would facilitate sports-based gambling in their states, although such legislation awaits. In the meantime, several states where a limited amount of betting is already allowed may soon expand this permission.
Given all this, bold growth expectations for the industry don't seem so far-fetched.
And U.S. sports fans certainly stand ready to do their part in driving the business's growth. Numbers from Nielsen suggest more than half of all domestic sports fans are interested in wagering, and Deloitte reports that more than one-fifth of the nation's sports fanatics have made at least one sports-based bet within the 12 months.
Their motivation? Unsurprisingly, 80% of bettors say wagering makes a matchup more exciting to watch. Meanwhile, a full one-third of Americans firmly support the prospect of making sports wagering available online and in-person at approved betting facilities, according to a poll performed by Ipsos.
Read between the lines: The winds of change are blowing in the industry's favor. There should be more than enough growth in store to support more than one player in the business. It just so happens that a well-established outfit like DraftKings is positioned to capture at least its fair share of this growth, if not more.
Five years down the road
The backdrop begs one overarching question: Where might these winds of change blow DraftKings five years from now?
Clearly, nobody owns a functioning crystal ball. However, there are some reasonable inferences that can be made about DraftKings.
The first inference has to do with revenue. The company's on pace to generate $3.7 billion worth of business this year, up 65% from last year's top line. Assuming the business continues to evolve and gain much-needed legal traction, that's still far from its full potential. DraftKings could be driving nearly $6 billion worth of annual revenue by 2027, according to the consensus estimate among analysts making such lengthy predictions.
That degree of revenue growth should pull the online sportsbook well into the black. The analyst community expects DraftKings to swing to a full-year profit as soon as 2025.
Do take this earnings outlook with a bigger grain of salt than you might with the revenue projection. Sometimes things end up costing more than a company or analysts anticipate, after all. Still, as long as the trajectory of DraftKings' bottom line continues to point upward, it creates support for the stock's price itself.
Stock price predictions are difficult to make simply because they require not just guesswork of how well (or how poorly) a company will do, but a guess as to how the market will feel about those results and a company's prospects in the future -- a tall order indeed.
To the extent such things can be safely predicted, however, don't be surprised to see DraftKings shares north of $60 apiece five years from now. That's more than a 60% improvement on its current value. Given its sales and earnings projections, though, that's a price in line with valuations of other growth companies of its kind.
Just bear in mind that there are no guarantees, even with the most promising of stocks. Also keep in mind that even if DraftKings shares get there, they're not going to get there in a straight line.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2025 $25 calls on Penn Entertainment and short January 2025 $30 calls on Penn Entertainment. The Motley Fool has a disclosure policy.