DraftKings' Price Target Cut: A Buying Opportunity in a Growing Market?

The gaming sector has never been more exciting—or more competitive. And right now, DraftKings (NASDAQ: DKNG) is at a crossroads. BMO Capital Markets recently lowered its price target on the company’s stock from $65 to $64, citing near-term headwinds like weaker-than-expected sports betting revenue and promotional pressures. But before you hit the sell button, let’s dig deeper. This isn’t just about a minor price adjustment—it’s about whether DraftKings can sustain its growth in a booming industry.

The Near-Term Slump: Why the Price Target Cut?

BMO’s decision isn’t entirely surprising. DraftKings’ Q1 2025 results showed a 20% year-over-year revenue increase to $1.41 billion, driven by its expanding customer base and the Jackpocket acquisition. But the company also slashed its full-year guidance due to customer-friendly sports outcomes—like high payout rates during March’s NCAA tournament—which temporarily depressed margins. Adjusted EBITDA came in at $103 million, up from $22 million a year earlier, but below some analysts’ expectations.

The real issue? Promotional intensity and regulatory hurdles are squeezing profitability. For instance, Illinois’ proposed sports betting tax hike and Maryland’s increased tax rates are eating into margins. BMO also flagged concerns about live betting competition from rivals like FanDuel and PointsBet.

But Here’s the Bull Case: DraftKings Is Still Winning Customers

Let’s not lose sight of the bigger picture. DraftKings added 10.1 million customers as of Q1 2025, a 42% year-over-year jump, with average monthly unique payers (MUPs) rising to 4.3 million (up 28% YoY). That’s a record customer base, and they’re acquiring users at lower costs than ever.

CEO Jason Robins emphasized on the Q1 earnings call that the company’s structural sportsbook hold percentage improved to 11.2%—a sign of operational efficiency. Meanwhile, live betting now accounts for over 50% of total handle, a critical metric for long-term profitability.

The Long Game: Why DraftKings Could Soar

BMO’s $64 price target is still 30% above DraftKings’ current stock price of ~$36, and the firm’s “Outperform” rating isn’t an accident. Here’s why bulls are optimistic:

1. Market Expansion: DraftKings operates in 25 U.S. states and D.C., covering nearly half the population. Pending launches in Missouri and new iGaming markets could add $1 billion+ in revenue over the next few years.
2. AI-Driven Innovation: The company is pouring resources into AI tools to boost customer engagement and reduce costs. Early results? A 7% increase in ARPMUP (excluding Jackpocket’s lower-margin users).
3. Balance Sheet Strength: With $1.1 billion in cash and a first-ever positive free cash flow in 2024, DraftKings has the financial firepower to weather storms and invest in growth.
4. Valuation: At 10.5 times its 2026 free cash flow estimate, the stock looks cheap compared to its $60.92 GuruFocus 12-month valuation.

The Risks: Don’t Ignore the Storm Clouds

BMO isn’t blind to the risks. Regulatory uncertainty—like Illinois’ tax hikes—could crimp margins further. And while DraftKings is winning customers, live betting adoption is a double-edged sword: it drives volume but can also lead to volatility if outcomes favor customers.

Final Verdict: Buy the Dip, But Keep an Eye on Earnings

DraftKings’ Q1 stumble is a speed bump, not a roadblock. The company’s customer growth, operational leverage, and strategic investments position it to dominate as U.S. online gaming expands.

Key Data Points to Watch:
- Q2 2025 Earnings: Can DraftKings stabilize margins despite sports outcome volatility?
- Regulatory Wins: Will Missouri’s sports betting launch (pending approvals) and new iGaming markets materialize?
- Balance Sheet: Can free cash flow hit the projected $750 million in 2025?

If you’re a long-term investor, now is the time to buy. The stock trades at a discount to its growth potential, and BMO’s price target implies significant upside. Just remember: this is a high-risk, high-reward play. But in a sector growing at 20%+ annually, DraftKings’ fundamentals are too strong to ignore.

Bottom Line: The BMO downgrade is a blip. DraftKings’ dominance in customer acquisition and its path to profitability make it a buy—especially at these prices.