DraftKings had a solid quarter

THE DraftKings Inc. NASDAQ: DKNG The stock price fell more than 5% following the fourth-quarter release and guidance update, and that could be bad news for investors.

A 5% move is substantial for a stock and can lead to a deeper correction or even a reversal in price action. However, as bad as it may seem, DraftKings’ move is a healthy correction within a raging bull market that will soon lead to higher prices and new highs.

Fourth quarter results were tepid, only relative to solid expectations. Analyst estimates aside, the company delivered revenue growth of nearly 50% year-over-year (YOY). The underperformance was minimal, offset by wider-than-expected margins and warm guidance.

The news sparked a reset among analysts but not the stock price. The first conclusion that emerges from the chatter is that analysts are defending their positions, bringing an overheated market back to reality.

Market beat analysts’ estimates for DKNG; the uptrend is intact

How does the 5% decline compare to analysts’ price target estimates?

Optimal. The 5% pullback took the market near $42, above analysts’ consensus target and critical support. Critical support combines the recently broken resistance and the short-term 30-day moving average. If it is confirmed as support, it will signal the continuation of the existing uptrend.

MarketBeat.com has tracked more than two dozen analyst reports and reviews since August 2023. The stock raised consensus to “moderate buy” from “hold” and price target 100% in mid-February 2024 The most recent targets include the highest, $55, more than 30% higher than the post-release action.

Needham, another recently set target, reiterated a “buy” rating and $50 target, implying that a buying opportunity is at hand for this consumer tech stock.

DraftKings’ growth is slowing, but valuations are catching up

DraftKings had a solid quarter despite falling short of the analyst consensus. The company reported net sales of $1.23 billion, a 44% increase from last year. The revenue loss is minimal, just a penny, less than 100 bps, and offset by user growth, penetration, margin and guidance.

Monthly active users increased 37%, compounded by a 6% increase in revenue per user, driven by new markets, improved access and cross-selling opportunities. Fourth-quarter earnings bring cumulative growth to about 200% over the past six quarters. Revenue would have exceeded consensus if not for favorable consumer findings late in the quarter.

Promotional and cross-selling have helped improve the company’s retention rate and increase profits. GAAP results show a loss related to the expanding business but not enough to upset the balance sheet. Adjusted earnings came in at 29 cents, beating the consensus estimate by more than a cent, reversing last year’s loss.

The guidance is not a grand slam, but a solid success for investors. The company grew revenue and earnings midway to consensus estimates with acquisitions and new market penetration to drive momentum. Key drivers in 2024 include the opening of the North Carolina and Puerto Rico markets to mobile gaming, which represents 4% of the U.S. addressable market.

Share price discounts and improved earnings prospects are helping align valuation with growth.

The technical perspective: DraftKings support is already evident

The market is down following the DraftKings report, but is already showing support above critical levels, swinging up and down within a narrow range. If the market follows the signal, it could start to rebound immediately and lead to a new high for the stock. Otherwise, DKNG could fall back to the $40 level or lower before a solid signal is given.

There is a possible headwind for the market associated with insiders. Insiders own 50% of the company and are selling in the rally. Sales have been limited over the past 12 months, worth just 0.6% of the current market capitalization, but they have increased sequentially and could rise as share prices rise.

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