Is further upside in store for the DraftKings share price post Q1 earnings?

DraftKings: evaluating a premium valuation in the hospitality sector

DraftKings, the digital sports entertainment and gaming company, has distinguished itself in the hospitality industry not just through its business model but also through its notably high price-to-sales (P/S) ratio of 5.6x. This figure starkly contrasts with the industry standard, where nearly half of the companies maintain a P/S ratio below 1.3x. It raises an important question - is this premium valuation of DraftKings justified or could it possibly be an inflated market anomaly?

Growth trajectory and market optimism

The platform has demonstrated a significant revenue upturn, recording a 64% increase in the past year alone. This surge not only reflects strong operational performance but also likely fuels investor confidence. Looking forward, the anticipation doesn't seem to wane, with analysts projecting an annual growth rate of 23% over the next three years for DraftKings, a figure that notably surpasses the broader hospitality sector's expected growth of 11%.

This optimistic outlook might explain the willingness among investors to bet more on DraftKings' stock, expecting the growth trend to persist. But it's crucial to delve deeper and scrutinise whether these high expectations anchored in the current 5.6x P/S ratio are rooted in reality or wishful thinking.

A critical upcoming earnings report

A pivotal moment is on the horizon for DraftKings with its upcoming Q1 earnings report slated for 2 May. Market expectations are set high with forecasts of a 68% improvement in EPS to –28 cents per share and a 46% rise in revenue to $1.124 billion. This impending earnings release will serve as a critical litmus test. It will either reinforce the current premium valuation through solid performance metrics or prompt a re-evaluation if the results fall short of the bullish forecasts.

In essence, while DraftKings currently trades at a premium relative to its peers, its robust historical growth and ambitious future projections lend some credence to the optimistic market sentiment. However, the sustainability of this high valuation fundamentally hinges on the company's continued ability to meet or exceed market expectations. Investors and analysts alike await the upcoming financial disclosures to better assess if the high P/S ratio is a mark of prescient valuation or overzealous speculation.

How to trade Draftkings into the results

LSEG Refinitiv data shows a consensus analyst rating of ‘buy’ for Draftkings – 8 strong buy, 20 buy, 7 hold and 1 sell (as of 1 May 2024).

DraftKings technical view

The Draftkings share price, up around 27% year-to-date, remains within a solid medium-term uptrend with its 2 ½ year March high at $49.57 remaining in sight. Interestingly, it was made right at the 61.8% Fibonacci retracement of its 2021-to-2022 decline.

DraftKings Weekly Chart

While the 2023-to-2024 uptrend line, 200-week simple moving average (SMA) and January low at $35.30 to $31.98 underpin, the medium-term uptrend will stay intact.

For upside in the Draftkings share price to resume, not only Monday’s high at $44.31 will need to be exceeded but also the February and mid-April highs at $45.62 to $45.69. Such a move would put the psychological $50 mark back on the cards ahead of the October 2021 peak at $51.30.

DraftKings Daily Chart