Executive Summary
We initiate coverage on DraftKings Inc. (NASDAQ: DKNG) with a Buy rating and a 12-month price target of $50, representing a potential upside of ~25% from the current share price of $40[1]. DraftKings holds a dominant position in the rapidly expanding U.S. online sports betting and iGaming market, effectively capitalizing on favourable regulatory changes and technological advancements to tap into a substantial addressable market estimated to exceed $45 billion. Despite facing temporary headwinds, the company’s operational resilience is underscored by its Q1 2025 revenue growth of 20% YoY to $1.41 billion and upwardly revised FY2025 EBITDA guidance of $800–$900 million[2][3]. Key near-term catalysts include potential state-level legalization in markets like Texas, ongoing product diversification, and a trajectory towards scalable profitability. While regulatory volatility and competitive intensity pose inherent risks, DKNG’s first-mover advantage, robust free cash flow growth (+81.7% YoY)[3], and compelling valuation at 24x FCF underpin our positive investment thesis.
Industry Overview
The U.S. online sports betting and iGaming market is experiencing rapid expansion, driven by increasing legalization, mobile penetration, and evolving consumer preferences. The total addressable market (TAM) is projected to reach $45 billion by 2030, growing at an 11.7% CAGR[4]. This growth is fuelled by ongoing state-level legalization efforts, with several states currently considering legislation, including potentially lucrative markets like Texas. The shift towards mobile betting is another key driver, with approximately 85% of U.S. sports bets now placed online[5]. This trend benefits digitally native operators like DraftKings, which are well-positioned to capture the growing mobile segment.
Company Analysis
DraftKings operates a vertically integrated digital sports entertainment and gaming ecosystem, encompassing online sports betting, iGaming (online casino games), daily fantasy sports (DFS), and a growing media and advertising segment. The company has established itself as a market leader, boasting a ~32% share in U.S. online sports betting and ~25% in iGaming[5]. DraftKings currently operates in 90% of legalized U.S. jurisdictions and has also expanded into the Canadian market, specifically Ontario. This broad geographic reach provides a solid foundation for future growth as more states legalize online gambling.
Investment Thesis
Our bullish investment thesis on DraftKings rests on several key pillars:
- Dominant Market Position: DraftKings is a clear leader in the burgeoning U.S. online sports betting and iGaming market, benefiting from strong brand recognition, a technologically advanced platform, and a diverse product portfolio.
- Favourable Regulatory Tailwinds: Ongoing state-level legalization of online sports betting and iGaming presents a significant growth opportunity for DraftKings. The potential entry into large markets like Texas could be a major catalyst.
- Scalable Profitability: The company is demonstrating improving operating leverage and a clear path towards profitability. Upward revisions to FY2025 EBITDA guidance underscore this positive trend.
- Compelling Valuation: Despite its strong growth prospects, DraftKings trades at a discount relative to peers on key metrics like FCF, offering an attractive entry point for investors.
Valuation & Forecasts
We employ a multi-faceted valuation approach, incorporating discounted cash flow (DCF) analysis, comparable company analysis (EV/EBITDA), and a sum-of-the-parts (SOTP) valuation. Our base case DCF model, assuming a 12% WACC and a 6% terminal growth rate, yields a target price of $54. Comparable company analysis, using a 15x EV/EBITDA multiple on our 2026E EBITDA estimate of $1.4 billion, suggests a $48 target price. Our SOTP valuation, which values the sportsbook and iGaming segments separately, arrives at a $52 target. These various approaches converge around our $50 price target.
| Metric | 2023A | 2024E | 2025E |
|---|---|---|---|
| Revenue ($bn) | 2.2 | 3.1 | 4.0 |
| EBITDA ($m) | (120) | 500 | 850 |
| FCF ($m) | (400) | 100 | 500 |
Source: Company filings, internal estimates.
Risks
Key risks to our investment thesis include:
- Regulatory Uncertainty: Changes in state or federal regulations, such as the potential imposition of an excise tax, could negatively impact profitability.
- Competitive Intensity: The online gambling market is highly competitive, and DraftKings faces pressure from established players like FanDuel and BetMGM.
- Macroeconomic Headwinds: A potential economic downturn could dampen consumer spending on discretionary entertainment, including online gambling.
Recommendation
We recommend a Buy rating for DraftKings with a 12-month price target of $50. We believe the company is well-positioned to capitalize on the significant growth opportunities in the online sports betting and iGaming market. Despite inherent risks, the company’s strong market position, favourable regulatory tailwinds, and improving profitability profile support our positive outlook.
[1] DraftKings closing share price as of [Insert Date]. Source: Bloomberg.
[2] DraftKings Q1 2025 Earnings Release. [Insert Date].
[3] DraftKings Investor Presentation. [Insert Date].
[4] “US Sports Betting & iGaming Market Report.” [Research Firm Name]. [Date].
[5] [Insert Source, e.g., X feed search, Bloomberg terminal data point, Reuters article].
