DraftKings Could Face Margin Headwinds This Year. Analysts Slash Their Targets.

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Shares of

DraftKings

were rising on Tuesday, even after analysts cut their price targets as they fretted over the company’s long-term profitability.

DraftKings’ (ticker:

DKNG

) fourth-quarter earnings, reported on Friday, surpassed analysts’ expectations. The company also raised its revenue guidance for the year to between $1.85 billion and $2 billion, in line with estimates.

But its top line will likely be affected by a wider Ebitda—or earnings before interest, taxes, depreciation, and amortization—loss in 2022 than predicted, as competition in online sport gambling heats up. DraftKings is predicting Ebitda losses between $825 million and $925 million. The Street consensus was $572 million.

Management plans to spend heavily to open up gambling in new states throughout the course of the year, adding to the pressures on the company’s Ebitda margins.

The stock was up 1.9% to $17.65 on Tuesday, following a 5.5% decline in premarket trading. The shares lost 22% when the markets closed on Friday, and 36% this year.

Truist analyst Barry Jonas cut his price target for the stock to $22 from $30 and retained a Hold rating on the stock, based on the continuing market correction after earnings.

“While we still see DKNG as a long-term winner and admit risk/reward feels positively skewed here, we remain Hold-rated for now – looking for improving market sentiment and more profit visibility,” Jonas wrote in a research note.

Although management signaled most markets could be profitable in 2023, Jonas believes there is still nearly a decade to go before profit is stable, with “years of losses before then.” The company’s current valuation, which has been recently battered by additional concerns over rising yield rates, is “anchored on very long-term targets,” he added.

Other analysts are more bullish on the stock. Oppenheimer’s Jed Kelly maintained an Outperform rating while lowering his price target to $32 from $35. The analyst raised his 2023 fiscal year revenue by 15%, saying he saw the online sports betting market growing faster than expectations.

Kelly estimates the U.S. legal sports betting market could grow by around 34% annually as states continue to legalize it, reaching about $11.5 billion by 2025, and $15.3 billion in 2028. He believes DraftKings could achieve between 25% to 30% of market share.

“We encourage [long-term] investors to accumulate shares based on DKNG’s top-2 positioning of owning the customer as leagues increasingly rely on digital players to drive fan engagement,” Kelly wrote in a research note.

Citigroup

maintained a Buy rating as well, and a $40 price target.

Of the 29 analysts covering the stock, 16 rated it a Buy or Overweight, 12 rated it a Hold, and one gave it a Sell. The mean price target is $37.84.

Write to Sabrina Escobar at [email protected]