DraftKings vs. Golden Nugget: Which Online Betting Stock Could Yield Higher Returns?
Online betting stocks are becoming increasingly popular among investors, as more states in the U.S. are legalizing online betting. The U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act 2 (PASPA) three years back, and a new sentiment toward online betting is slowly spreading across the U.S.
According to a FinancialBuzz report, 19 U.S. states are expected to decide on the legalization of sports betting this year. This could significantly benefit online sports betting companies.
Using the TipRanks Stock Comparison tool, we will compare two online betting companies, DraftKings and Golden Nugget Online Gaming, and see how Wall Street analysts feel about these stocks.
DraftKings is an online sports gaming and entertainment company that provides its users with a sports betting Sportsbook, daily fantasy sports, and online casino gaming opportunities.
Last week, the stock was in the news as a research firm, Hindenburg Research, published a research report titled, “DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations.”
The report claimed that DraftKings’ merger with SBTech has resulted in the company's exposure to extensive dealings in black-market gaming, money laundering, and organized crime. Hindenburg based their report on their review of SEC filings and discussions with former employees.
In addition, the report claimed that SBTech earns 50% of its revenue from markets where gambling is banned. DKNG went public last year through a three-way merger between DraftKings, its SPAC sponsor, and SBTech, a Bulgaria-based gaming technology company.
Following the Hindenberg report, DKNG stated, “This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price… Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings.”
Following the Hindenberg report, Jeffries analyst David Katz reiterated a Buy and a price target of $75 (56.1% upside) on the stock. Katz said in a research note to investors, “In short, the pivotal matters are whether DKNG properly disclosed its exposures through SBTech and whether there remains any exposure today. Pending further details, we see no reason to change our rating.”
Katz noted that there was a key difference between the lottery markets such as in Oregon (OR) and commercial markets such as in New Jersey (NJ) or Philadelphia (PA), as commercial markets require more complex regulatory approvals.
Considering this difference, Katz stated, “We believe regulators could possibly feel compelled to examine digital gaming companies' exposure to gray markets more closely going forward. This could have an impact on the value of our TAM [total addressable market] if a change in the timing of market activation were to become longer, not just for DKNG but for all prospective operators.”
The analyst added that his focus remained on the due diligence done by DKNG during the SBTech acquisition. According to Katz, the acquisition was done “primarily for the purpose of owning and developing the technology, rather than any revenues or profits generated outside the US, which we believe should mitigate the risks to some degree.”
According to the analyst’s financial model for DKNG, SBTech could generate 6.9% of DKNG’s total revenues in FY22.
Katz added, “Ultimately we remain confident in DKNG's structural abilities, but hesitate to react aggressively one way or the other, pending more conclusive information. Longer term, we remain comfortable with DKNG's positioning and capabilities.”
In Q1, DKNG posted revenues of $312 million, a jump of 253% year-on-year. Revenue was up 175% year-on-year after giving pro-forma effect to the company’s acquisition of Diamond Eagle Acquisition Corp and SBTech Global Ltd, which was completed on April 23 last year.
However, the company’s losses widened to $346.3 million in Q1 versus a loss of $68.7 million in the same quarter last year. (See DraftKings stock chart on TipRanks)
DKNG has raised its financial outlook for FY21 and expects revenues to land between $1.05 billion and $1.15 billion versus earlier forecasts of between $900 million and $1 billion.
The upgraded guidance is a result of DKNG’s strong activation of its user base due to effective marketing, the launch of mobile sports betting in Michigan and Virginia, and iGaming in Michigan. The fiscal outlook also assumes that all professional and college sports events will take place as scheduled, and DKNG continues to operate in the U.S. states in which online sports betting is currently live.
Consensus among analysts on Wall Street is a Strong Buy based on 16 Buys and 4 Holds. The average analyst DKNG price target of $69.38 implies approximately 44.4% upside potential to current levels.
Golden Nugget Online Gaming (GNOG)
Golden Nugget Online Gaming is an online gaming (iGaming) and digital sports entertainment company that currently operates in the U.S. states of New Jersey and Michigan.
The online gaming company posted revenues of $26.7 million in Q1, up 54.2% year-over-year. However, the company posted an adjusted loss before interest, taxes, depreciation and amortization of $3.5 million versus an adjusted EBITDA of $5.9 million in the same quarter last year.
For FY21, GNOG has forecast revenues between $130 million to $145 million. The company expects that for FY21, EBITDA will continue to be negative and will range between 15% to 20% of revenues.
Following the first-quarter results, Jeffries analyst David Katz reiterated a Buy with a price target of $28 (121.5% upside) on the stock. Katz said in a note to investors, “Quarterly results are in line with expectations and should be a neutral event. More critical to the story, in our view, is the company's ability to gain access and launch in new states, which appears to be forthcoming, according to management commentary during call.”
“Overall, we believe the company is uniquely positioned to capture the higher-margin iGaming customers and achieve profitability earlier than peers,” Katz added.
Over the past four years, GNOG’s revenues have grown at a compounded average growth rate of 50%. The company is expanding rapidly in the U.S. and has secured market access agreements in Colorado with Z Casino and in Iowa with the Wild Rose Casinos. Its agreements cover both online gaming and online sports betting. (See Golden Nugget Online Gaming stock chart on TipRanks)
Additionally, the company has also negotiated market access agreements in the states of West Virginia, Virginia, Pennsylvania, Illinois, New York, and expects to go live in four more states this year.
As GNOG expands rapidly into new markets, it expects to make “significant strategic investments in player acquisition." As a result, the company said at its earnings call, “…we expect our investments to result in negative EBITDA in the first two years of operation, while achieving breakeven in year three in iGaming space.”
The company also plans to expand its content offering with around 100 new games from different content providers, as it believes that content is a key driver of player spend and activity.
Consensus among analysts on Wall Street is a Moderate Buy based on 2 Buys. The average analyst GNOG price target of $24 implies approximately 89.9% upside potential to current levels.
Bottom Line
While analysts are bullish about DKNG, they are cautiously optimistic about GNOG as the company is still in the process of expanding to different markets in the U.S.
Based on the upside potential over the next 12 months, GNOG seems to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
