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2 Tech Stocks to Buy on Dips

Recently, tech stocks have been selling off across the board on rising interest rates. Taylor Dart explains why this is an opportunity to accumulate shares in Draftkings (DKNG) and Gan Limited (GAN).

It’s been an exciting start to the year for investors, with several tech stocks up more than 20% year-to-date and the Nasdaq Composite (COMPQ) up over 5% to start the year. This relentless rally has added to an already impressive 44% return for the market last year, with 2021 on track to nearly match last year’s performance if this momentum continues.

The only negative development that’s come from relentless bid under the market is that sentiment remains in nosebleed territory, with investors buying calls relative at the most pronounced pace in nearly a decade. Therefore, further upside could be a little more dependent on strong stock selection vs. the uniform bid we’ve seen across nearly all stocks the past year. One theme that’s done very well this year is the Online Gambling space, so we’ll look at two stocks in this industry group below:

Chart, line chart Description automatically generated

(Source: TC2000.com)

One of the key themes that has produced a lot of winners this year is Online Gambling, given that states are continuing to legalize online sports betting since the election. There is still significant white space in the United States in terms of states yet to legalize online sports betting, and two names that have done quite well in the group are Draftkings (DKNG) and GAN Limited (GAN). The first company has a $23BB market cap and is the leader in online sports betting, while the second provides the tech casinos need to bring their business online and sports a $1BB market cap. Let’s take a closer look at both companies below:

Chart, bar chart Description automatically generated

(Source: Company Presentation)

Beginning with GAN Limited, the company is a leading developer and supplier of online gaming content and enterprise-level business-to-business gaming software systems. The company deals with casinos and provides the software that they need to handle things like account registration, regulated limits management, regulatory reporting, as well as GAN’s proprietary content. GAN has already scored major deals with companies like Wynn Resorts (WYNN) and Churchill Downs (CHDN). So far, the company’s revenue growth is incredible, with a two-quarter average revenue growth rate of 93%. The biggest recent development is the company’s announcement that they’ve acquired Coolbet, an international sportsbook that complements its stack. The biggest benefits of this deal are how it complements GAN’s current offering and the increase in the scope of potential customers, and geographic diversification.

Graphical user interface, text, application Description automatically generated

(Source: YCharts.com, Author’s Chart)

At first glance, many investors will likely shy away from GAN, given that the company does not have positive earnings yet, and has had a strong run since its IPO debut. However, if we look at the sales growth above and factor in the inclusion of Coolbet, the growth here is near exponential.

Based on Q1 2021 estimates, GAN is expected to grow revenue by more than 150% year-over-year, with Q2 2021 estimates of $23.8MM translating to a further acceleration to nearly 190% growth year-over-year. These are incredible figures, making GAN one of the highest growth names on the US Market currently. Besides, the trend in legalization still has much further to go, with analysts projecting state legislatures in Arizona, Connecticut, Texas, and several other states in the future, with the major state being New York that’s still yet to be confirmed.

While GAN looks expensive, making a new all-time high at more than 25x FY2020 sales of $38.2MM, it’s worth noting that FY2021 revenue could reach $90MM, which makes the valuation a lot more palatable. Generally, a 20x multiple is not expensive at all for companies able to grow revenue by more than 100% year-over-year, so GAN is actually reasonably valued if it can meet analyst estimates. Therefore, while I wouldn’t be inclined to buy this breakout in the stock as GAN is a little extended short-term, I think it’s a name to watch closely if we see market weakness and the stock dips sharply.

A picture containing chart Description automatically generated

(Source: TC2000.com)

The other name that investors should keep on their shopping lists is Draftkings, a company that continues to be a leader and one of the most well-known names in the online sports betting movement. DKNG reported quarterly revenue of $133 million in its most recent quarter, a 42% jump year-over-year, and this was despite Q3 being a relatively soft quarter for sports due to COVID-19. Looking ahead, Q4 and Q1 should be much stronger for the company, with NHL, NBA, and the NFL playoffs lying in this period.

This stacked sports betting period should have an increased tailwind with more states moving online and Draftkings increasing the numbers of states where it operates. As shown below, there is still considerable room for this market to grow, with less than half of states legalizing sports betting to date.

Map Description automatically generated

(Source: Company Presentation)

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(Source: YCharts.com, Author’s Chart)

Similar to GAN, DKNG does not have positive annual earnings per share yet, but the trend is clearly heading towards positive annual EPS in FY2023 or FY2024. As shown above, the company’s net losses per share are narrowing considerably, and these earnings estimates are likely far too conservative if New York does end up coming online for sports betting. However, if we value DKNG based on sales and evaluate its sales growth, the growth is incredible and dwarfs most other tech companies.

Based on current forecasts, DKNG is set to grow revenue by 70% year-over-year in FY2020 and follow this up with 59% growth, or roughly $900MM in revenue in FY2021. So, while over 30x sales looks expensive for the stock here, DKNG is actually trading at barely 25x sales FY2021 sales if it just meets estimates and less than 18x FY2022 revenue estimates of $1.3BB. Besides, there is considerable upside to all of these forecasts if more states come online at a steady pace, which is looking quite likely.

Chart, line chart Description automatically generated

(Source: TC2000.com)

As the chart above shows, DKNG just broke out to a new high and is now pulling back to re-test its base. I believe the $50.00 level would represent an attractive entry to bake in a margin of safety because it would leave the stock valued at barely 15x FY2022 revenue estimates. Therefore, while I see the stock as a Hold here, I would look at starting a new position in the stock if we can see a deeper pullback. Obviously, there’s no guarantee we get a pullback, but this is where the valuation would become quite attractive again.

Most investors are focused on the short squeeze candidate of the month or lower-priced stocks, but both DKNG and GAN are two high-growth companies in a high-growth industry trading at reasonable valuations given their TAM. Therefore, I believe these are two names that investors should keep on their shopping lists going forward. If we could see a sharp pullback in either name, I believe this would present a low-risk opportunity to start a position.

Disclosure: I have no positions in the stocks mentioned

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

 

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DKNG shares were trading at $61.54 per share on Thursday morning, up $1.26 (+2.09%). Year-to-date, DKNG has gained 32.17%, versus a 4.08% rise in the benchmark S&P 500 index during the same period.



About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

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