DraftKings (DKNG): A Contrarian Gem in a Slumping Market

Amidst a broader market downturn, DraftKings (DKNG) is carving out a distinct path, buoyed by robust earnings growth and a strategic positioning in the expanding gaming sector. While the S&P 500 has dipped 4.3% year-to-date, DraftKings' shares have held steady, reflecting underlying fundamentals that suggest it's a compelling contrarian buy. Let's dissect the data to understand why this stock could thrive even as the market stumbles.

The Case for DraftKings' Fundamentals

DraftKings' recent earnings estimates reveal a story of resilience. For Q1 2025, the company reported EPS of $0.12, a significant rebound from a $0.30 loss in Q1 2024. While the miss against consensus estimates (-33.33% EPS surprise) raised eyebrows, the year-over-year growth is undeniable: EPS is projected to surge 233% in 2025, with revenue growth of 31.6% to $6.37 billion. The next fiscal year's estimates are even stronger, with EPS expected to rise a further 34.8%. These figures suggest DraftKings is capitalizing on its vertical integration in legalized sports betting and iGaming, where it holds a leadership position.

Despite the market's weakness, DKNG's stock has underperformed slightly compared to its peers, offering a buying opportunity. The disconnect between its strong growth metrics and lackluster valuation creates a compelling entry point.

Zacks Rank: A Neutral Signal with Hidden Upside

The Zacks Rank assigns DKNG a #3 (Hold), reflecting mixed analyst sentiment. This rating stems from flat earnings revisions over the past month and inconsistent quarterly performance: the company has only beaten EPS estimates once in the last four quarters. However, the Zacks system's historical track record is a key mitigating factor. Since 1988, #1-ranked stocks have averaged +25% annual returns, outperforming the broader market by a wide margin.

While DKNG isn't a #1 (Strong Buy) today, its upward revisions in long-term growth projections (e.g., 17.4% revenue growth in 2026) hint at a potential future upgrade. The Zacks Rank is short-term focused, but DraftKings' trajectory suggests it could soon enter the “buy” category.

Valuation: Overpriced or Priced for Growth?

Critics point to DraftKings' Zacks Value Style Score of D, implying it's overvalued relative to peers. Metrics like a high P/E ratio and premium P/S ratio compared to historical norms fuel this skepticism. However, this ignores the company's rapid expansion. In states where sports betting is legal, DraftKings commands a 30% market share, and its iGaming platform is scaling rapidly.

A premium is justified if growth materializes. With 2025's EPS growth of 233%, the P/E multiple could compress sharply as earnings catch up to the stock price. Meanwhile, the Gaming sector's weak Zacks Industry Rank (bottom 41%) creates a tailwind: sector-wide pessimism could suppress DKNG's valuation, even as its fundamentals strengthen.

Industry Positioning: Riding the Legalization Wave

The U.S. sports betting market is projected to hit $33 billion by 2027, driven by state-by-state legalization. DraftKings is a front-runner in this expansion, with licenses in 20 states and partnerships with major sports leagues. Its vertically integrated model—combining betting, iGaming, and live events—differentiates it from competitors like FanDuel (FDGL), which relies more on third-party partnerships.

The recent Q1 miss was partially due to softer-than-expected revenue in Pennsylvania and New Jersey, but management remains confident in its roadmap. Meanwhile, peers like International Game Technology (IGT) face headwinds, with lowered estimates and a weak industry outlook. DraftKings' focus on high-growth states like California (where it's a top operator) positions it to outpace the sector's struggles.

Investment Thesis: Buy the Dip

The contrarian case for DraftKings hinges on three pillars:
1. Earnings Momentum: Despite quarterly hiccups, the long-term growth trajectory is undeniable.
2. Valuation Catalysts: A Zacks Rank upgrade or earnings beat could trigger a re-rating.
3. Industry Leadership: Its scale and partnerships give it a sustainable competitive edge.

While the current Zacks #3 rating suggests neutral near-term prospects, the stock's underlying health and growth tailwinds make it a buy at current levels. Investors should target entry points below $15, with a price target of $20–$25 by 2026, assuming earnings growth materializes.

Final Take

DraftKings isn't without risks—regulatory shifts and intense competition loom large. Yet its moat in legalized markets, paired with a valuation that's become more reasonable after recent dips, makes it a standout contrarian play. For investors willing to look past short-term noise, DKNG could deliver outsized returns as the gaming sector matures.

In a market starved for growth, DraftKings' fundamentals are a rare bright spot. The time to buy? Now.