DraftKings (DKNG) shares slid on Monday as Wall Street analysts downgraded the stock to Underweight amid a bleaker-than-expected outlook for the online gambling company in 2023.
“We suggest investors rotate out of DraftKings and Penn Entertainment (PENN) which we are downgrading today,” JPMorgan analyst Joseph Greff wrote in a research note published Monday. “For DKNG, we see a longer runway and more risk to achieving [online sports betting] profitability than its peers and with the stock’s bounce since earnings, we see 20% downside to our year-end 2023 price target.”
JPMorgan noted the Penn Entertainment move as a “valuation call” and projected the stock will continue trading near its current price target with less upside than other casino stocks, but there were more disgruntling signs in DraftKings over the next 12 months, according to Greff.
The analyst note highlighted that DraftKings’ recent full-year 2023 guidance for Adjusted EBITDA loss ($475M-$575M) is more than $100 million worse than what JPM had previously expected. That guidance announcement sank DraftKings shares more than 20% on Nov. 4 when it announced third-quarter earnings.
The stock has rallied since though, with shares up about 25% since its earnings day low. However, JPMorgan sees limited upside in DraftKings stock over the next 12 months.
Greff maintained a $12.00 price target but downgraded the equity to Underweight from Neutral.
“We use the rally in shares since its 3Q22 report on November 4th to downgrade the stock as we now see downside to our unchanged $12 price target,” Greff wrote.
JPMorgan’s $12 price target is in line with the valuation from BNP Paribas Exane as the lowest among Wall Street analysts tracked by Bloomberg. Analysts tracked on Bloomberg currently have 17 Buy ratings, 13 Holds, and 2 Sells. The consensus price target averages out at $20.94.
Still, Greff noted there were three potential upside risks to the JPM rating: More states legalizing sports betting at a quicker pace than expected, DraftKings reaching profitability faster than expected, and live in-game betting accelerating the company’s growth and/or market share.
The analyst note also highlighted two competitors to watch in the space: Caesars Entertainment (CZR) and MGM Resorts (MGM).
While public documents from states such as New York show Caesars and MGM holding significantly less market share than DraftKings, the companies have slowed marketing spend and are projecting profitability on a faster timeline.
Greff noted each company is “benefiting from meaningfully reduced promotions.”
Caesars CEO Tom Reeg noted on the companies most recent earnings call that online sportsbook was profitable in October, while MGM has projected profitability in 2023.
FanDuel (PDYPY), the market’s leader in states where it operates, posted a quarterly profit earlier this year and has reiterated a projection for full-year profitability in 2023.
Josh is a reporter and producer for Yahoo Finance.
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