Competitive forces are weighing on this company and the entire industry.
Revenues continue to grow rapidly due to technology and product improvements.
This growth stock is trading at attractive value given how fast its bottom line is growing.
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Investors who saw S&P 500 will rise again to new all-time highs this month, one might wonder if they’ve missed the boat. Many of the best growth stock options appear to have become stretched, and if they can continue to grow, their future returns may not be as strong as in the recent past.
However, there are still many great opportunities in growth stocks for those willing to dive into the markets. In fact, one stock could double in the next year, according to at least one Wall Street analyst. Concerns about the competition have sent shares down, which is why it might make sense to bet DraftKings(NASDAQ: DKNG) over the coming years.
Image source: Getty Images.
DraftKings and its biggest competitor in the US market, FanDuel, were early adopters of online sports betting for their positions in the daily fantasy sports markets. Trademarks and technology of the parent companies of DraftKings and FanDuel Flutter entertainment(NYSE: FLOOD) allowed them to capture the majority of the market as online sports betting became legal by state.
But now that position is under threat from the rise of prediction markets. Platforms like Kalshi use yes/no futures, regulated by the Commodity Futures Trading Commission, which allows them to operate across the US regardless of state sports betting laws. While both DraftKings and Flutter have highlighted the threat of prediction markets in their recent earnings reports, Kalshi recently upped the ante by introducing “combo” contracts that allow people to make plays on the same game.
For those unfamiliar with betting terms, a parlay is a single bet on multiple outcomes. If you get them all right, the rewards can be significant. Same-game bets are specifically for single-game events, such as betting on which team will win and whether the result will be over or under the betting line.
DraftKings and FanDuel have expanded the number of events you can bet on during the game by providing detailed information, including individual player stats over specific time periods. Kalshi is now replicating this on its peer-to-peer event contracting platform. This is notable because parlays account for high volume, and more importantly, huge profit margins for DraftKings and FanDuel. Parlays have higher sports bets (the amount retained by the sports bettor) than straight bets.
DraftKings has taken steps to counter the threat of prediction markets. This includes the acquisition of Railbird, a licensed forecast contract exchange. It plans to operate an exchange in markets where online sports betting is still illegal. FanDuel also plans to launch a prediction contract exchange.
Despite these efforts, Kalshi and other prediction markets weighed on both stocks. Shares of DraftKings are down more than 35% from recent highs. Shares of Flutter, which is more globally diversified, fell 23%.
Needham analyst Bernie McTernan reiterated his $65 price target on DraftKings stock in May following the company’s first-quarter earnings report. Despite predictions of recent developments in the markets, he did not update his view on the stock. Still, his price target is now 105% above DraftKings’ current stock price. Importantly, even an average price of $51 per share represents significant upside for the stock.
There are good reasons to remain bullish on DraftKings. In particular, it is at the forefront of a growing trend in the US as more and more states legalize online sports betting. According to Grand View Research, the North American market will grow by approximately 11.5% per year by the end of the decade, and DraftKings has historically grown its market share.
Image source: Getty Images.
While the prediction markets threaten DraftKings’ market share, investors shouldn’t expect much of a challenge. DraftKings’ brand and technology remain a strong competitive advantage, allowing you to price your bets for optimal profit while giving punters the most action. Over the years, the strength of the DraftKings brand has proven resilient, even when big names like ESPN enter the market.
Finally, the regulatory aspect of this issue cannot be ignored. Kalshi and other prediction markets currently operate in a gray area, while DraftKings and other sportsbooks operate under state law. If regulation negatively affects the prediction markets, DraftKings will get a huge chunk of their business.
The stock is an absolute bargain at this price, with an enterprise value-to-EBITDA ratio of less than 22. Given management’s expectations of high operating leverage and EBITDA growth of around 150% this year, this is a great price for the company. Chances are good it will go up from here, even if it doesn’t.
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Adam Levy has no positions in any of the stocks mentioned. The Motley Fool recommends Flutter Entertainment Plc.The Motley Fool has a disclosure policy.
The 1 incredible growth stocks to buy before it soars 105%, according to Select Wall Street Analysts was originally published by The Motley Fool
