Investing.com -- Shares of DraftKings (DKNG) climbed 5% following an upgrade from Bank of America, which shifted its rating on the sports betting giant from Neutral to Buy. Analyst Julie Hoover maintained a $27 price objective for the stock, signaling a potential 45% upside and calling the recent 47% year-over-year pullback an attractive entry point for investors.

The upgrade marks a shift in Wall Street sentiment for DraftKings, which has faced significant pressure over the past year due to uncertain investments in prediction markets (PMs) and a string of unfavorable NFL outcomes. According to Hoover, those clouds are now lifting, presenting a highly favorable risk-reward scenario.

A central pillar of BofA’s renewed optimism is DraftKings’ strategic positioning in the emerging prediction market space. Hoover noted that the company has firmly established itself as the third-largest player in the sector, creating what she describes as a "win-win" scenario regardless of ongoing regulatory uncertainty.

If prediction markets receive regulatory green lights and remain viable, BofA estimates the segment could generate roughly $400 million in fees for DraftKings by 2027, supplemented by an additional $200 million to $400 million from market-making activities. Crucially, early fears that prediction markets would cannibalize traditional sports betting have not materialized; since the start of the football season, traditional sportsbooks have outpaced PM growth.

Conversely, if regulators ultimately shut down prediction markets, Hoover argues that the "terminal value overhang" will be lifted from the stock, likely supporting a higher valuation multiple. Furthermore, DraftKings’ early success in the PM arena demonstrates a capability that could eventually spur expansion into other expansive total addressable market (TAM) categories, such as crypto trading or collectible card rips.

Bank of America also highlighted that Wall Street estimates for the company appear to be bottoming out. DraftKings’ CEO recently confirmed at an industry conference that spending on prediction market investments could be "meaningfully" higher than initially expected. While this prompted BofA to lower its 2026 EBITDA estimate from $625 million to $500 million, the firm views this transparency as a de-risking event.

Looking further out, BofA is increasingly bullish. The firm raised its 2027 EBITDA estimate from $1.05 billion to $1.15 billion, driven by stronger core sportsbook performance and anticipated market-making contributions. Hoover suggested that DraftKings could soon guide 2027 EBITDA in the $1.0 billion to $1.2 billion range, a conservative estimate that embeds modest core growth and minimal PM contribution, leaving the company ample flexibility for continued investment.

BofA’s $27 price target is based on a 12x multiple of the firm’s 2027 EV/EBITDA estimates, which represents a modest discount compared to other best-in-class market disruptors. Hoover believes the market’s reaction to recent NFL headwinds and PM spending ambiguity has been overdone, creating the current buying opportunity.

While the setup into 2027 looks favorable, BofA did offer one caveat for the company’s long-term trajectory. To support higher incremental margins and better cash flow-through in 2028 and beyond, the firm noted it would like to see DraftKings implement stronger cost discipline within its core business operations.

Original Article