DraftKings Among Smaller Gaming Stocks That Could Grow in 2023

Published on: December 29, 2022, 01:54.

Last update: 29 December 2022, 02:46.

Entering Thursday, shares of DraftKings (NASDAQ:DKNG) had suffered a 59.77% loss in 2022, which reduced its market capitalization to $4.99 billion.

DraftKings
A picture from a DraftKings office. Jefferies believes the stock may bounce back in 2023. (Image: Bloomberg)

That’s at the lower end of mid-cap territory, and by far its previous market cap of around $35 billion, firmly in the large-cap space. However, some strategists believe that the beaten game name may return in 2023.

In a recent report, Jefferies equity strategist Steven DeSanctis outlines a scenario where lower-cap stocks like DraftKings could bounce back as soon as next month.

We see a good possibility based on the first 11 months being so bad, December is weaker than normal, but January is much better.” he wrote. “When most stocks are in the red for the year, next January’s return is also above average, with smaller market caps performing the best.”

DraftKings is one of 20 lower-market-cap names highlighted by Jefferies as offering rebound potential for 2023. While it’s one of several consumer discretionary stocks on the list, it’s the only playable name in the group.

Smaller Losses Essential to DraftKings 2023 Outlook

In November, DraftKings forecast a 2023 loss in earnings before interest, taxes, depreciation and amortization (EBITDA) of $475 million to $575 million next year, well ahead of the consensus estimate of $426 million on revenue of 2, $8 billion to $3.0 billion.

The online sportsbook operator added that EBITDA could be positive by the fourth quarter of 2023. With that forecast now effectively in stock, DraftKings needs to ensure that it at least meets the profitability deadline and significantly reduce expenses. This is because investors are losing patience with the operator’s spending and money-losing ways.

Beyond industry trends such as increased legalization of sports betting and iGaming, some macroeconomic factors could support a resurgence for DraftKings in 2023.

“The macro context continues to improve, with high-yield spreads close to 5% and below their long-term average. The dollar has weakened considerably since the peak, while volatility has eased.” DeSanctis noted.

How patient investors are willing to be is a different story, especially as rivals Barstool Sportsbook, BetMGM and Caesars Sportsbook approach profitability. FanDuel, the largest online sports betting operator, could be profitable annually for the first time in 2023.

Another gaming stock could shine in 2023

DraftKings isn’t the only betting stock analyst who is optimistic about the new year. Endeavor Group Holdings, Inc. (NYSE:EDR), the parent company of the Ultimate Fighting Championship (UFC), has been tipped by UBS as a potential winner in 2023.

“We see EDR as well-positioned to capitalize on secular trends in media, particularly sports rights inflation, while its revenue streams generally have low economic sensitivity.” according to the bank.

Endeavor acquired sports data business OpenBet from Light & Wonder earlier this year. The clients of this unit include some of the largest sports betting operators.

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