DraftKings (NASDAQ:DKNG) recently announced expectations of achieving free cash flow (FCF) this year, potentially bolstering investor confidence in DKNG stock. Utilizing a conservative FCF yield metric, analysts estimate a substantial increase in market capitalization, indicating significant upside potential for the stock.
Forecasting FCF Growth
Based on a projected FCF midpoint estimate of $360 million for the current year, applying a 1.5% FCF yield metric suggests a potential market cap of $24 billion. This represents a 13.7% increase from the current market cap of $21.1 billion. Moreover, with next year’s FCF estimate reaching up to $491.6 million, the implied market cap of $32.8 billion signifies a remarkable 55% surge from the current valuation.
Implications for DKNG Stock
Analysts foresee a possible 50% increase in DKNG stock’s value over the next 12 months, with a target price of $66.86 per share. This presents a promising opportunity for existing shareholders to capitalize on potential growth by selling short out-of-the-money (OTM) put options.
Strategic Use of OTM Put Options
Shorting DKNG put options, particularly those with elevated premiums in near-term expiry periods, offers an attractive income-generating strategy. For instance, considering the March 8 expiry period, selling OTM puts with a strike price of $41.00, 8% below the current price, yields premiums equivalent to 1.05% of the strike price.
Maximizing Returns
Investors can leverage this opportunity by securing cash or margin with their brokerage firms to sell short-put contracts. For example, selling 1 put contract at the $41.00 strike price yields an immediate return of $43.00 with an investment of $4,100. Alternatively, selling 5 put contracts can generate $215.00 on an investment of $20,500, translating to an expected return of 4.195% in just 90 days.
Protecting Against Downside Risk
Engaging in short OTM provides additional income and serves as a hedge against potential downside movements in DKNG stock. The generated income is a buffer against unrealized losses, further enhancing risk management strategies for investors.
Summary
DraftKings’ anticipated FCF growth presents a compelling opportunity for investors, with analysts predicting significant upside potential for DKNG stock. By strategically selling short OTM put options, investors can generate income while awaiting potential stock appreciation, enhancing portfolio returns and risk management capabilities.
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