Morgan Stanley strategists recently updated their semiannual lists of secular growth stocks, with online sports betting juggernaut DraftKings (NASDAQ:DKNG) making the cut.
The bank divides the list into two groups: Companies residing in the media, technology, and telecommunications industries, and those that aren’t members of those groups. Gaming stocks are usually classified as members of the consumer discretionary sector.
Morgan Stanley turned up 26 names residing outside the media, tech, and telecom spaces that fit the bill as secular growth stories. DraftKings, which some market observers say is richly valued relative to sports betting market prospects, made the Morgan Stanley list. It is the only gaming stock to do so.
We believe the transition to a mid-cycle environment will lower equity market multiples and the premium paid for structural growth — a process that is underway — while a multi-year upward trend for rates may challenge valuations in long-duration equities,” according to the bank.
Secular growth companies are defined as those that thrive regardless of what’s happening in the broader economy. While DraftKings’ life as a public enterprise to this point is short — its Nasdaq debut was in April 2020 — the operator navigated the rough coronavirus sports environment with surprising ease.
Another Important Forecast
For DraftKings and its peers, much of the long-term investment thesis on these names centers on more state-level legalization of online casinos and sports wagering, and how large those markets can grow to be. When it comes to total addressable market, estimates vary. But Morgan Stanley is bullish.
“We expect US sports betting and online gambling to go from a $3 billion market in 2020 to $15 billion in 2025,” said analyst Thomas Allen. “We forecast DraftKings achieving 25% market share, supported by the ability to acquire customers ~one-third cheaper than peers, given its legacy daily fantasy sports database and supporting tech infrastructure.”
While it’s one of a small number of pure play iGaming and sports betting equities, DraftKings is succumbing to broader weakness in the gaming space this year, as the shares are up just six percent year-to-date, compared to a 17.67 percent gain for the S&P 500.
DraftKings stock resides about 40 percent below the consensus Wall Street price target and 33.68 percent below its 52-week high. However, the name did jump 12.65 percent last week.
DraftKings Outlook Bright, But Competition Is Fierce
Boston-based DraftKings is making an assortment of moves to diversify its product portfolio and create revenue stream beyond daily fantasy sports (DFS), iGaming, and sports wagering. Those include media and technology acquisitions and getting into digital asset classes.
Those actions could pay off in the long run, because the online sports betting business is hyper-competitive and costly in which to acquire and retain customers.
By some estimates, FanDuel, not DraftKings, controls close to half the US online sports wagering market, confirming the latter is smart to make moves in other arenas.