DraftKings Named Top Gaming Idea for Second Half by Stifel

Posted on: July 5, 2024, 05:29h. 

Last updated on: July 5, 2024, 05:29h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of DraftKings (NASDAQ: DKNG) closed lower by almost 1% today, but some sell-side analysts remain bullish on the stock despite a loss of 18.29% over the past 90 days.

DraftKings stock
A DraftKings billboard appears at Times Square in New York City. An analyst called the stock a top idea for the second half.(Image: NASDAQ)

In a note to clients today, Stifel analyst Jeffrey Stantial rated DraftKings a “buy’ with a $50 price target, implying upside of 34.8% from today’s closing price while noting the stock is a top pick for the second half of 2024. He pointed out that headwinds such as the recently implemented tax hike in Illinois are priced into the shares.

We see well-discussed headwinds to 2Q24/2024E Consensus (IL tax hike; Jackpocket drag) as de-risked following recent revisions, with healthy core growth drivers (evidenced by recent state reported GGR trends) posing potential upside to reset buyside expectations,” wrote the analyst.

Illinois approved a graduated tax rate on online sports betting operators, forcing the largest sportsbooks in the state to pay higher percentages. Under the plan, which into effect on July 1, Illinois now has the second-highest sports betting taxes in the country and the rate applied to big operators such as DraftKings and FanDuel parent Flutter Entertainment (NYSE: FLUT) likely more than doubled.

Focus on DraftKings Free Cash Flow, Says Stifel

Based on prior reporting patterns, it’s estimated that DraftKings will deliver second-quarter results on Aug. 1. One of the big issues analysts and investors will be monitoring is free cash flow.

The gaming company has been free cash flow negative, but has made significantly strides on that front over the past three quarters. Last year, the operator was free cash flow negative to the tune of $103.03 million, but that was a marked improvement from the -$721.95 million posted in 2022, according to Macrotrends data.

DraftKings is about four years removed from becoming a standalone publicly traded company, meaning it’s still a young firm. However, there’s increasing chatter among sell-side analysts that with free cash flow inflecting at the gaming company, return of capital to shareholders could be announced over the near term. Stantial sees that as a possibility.

“DKNG’s forthcoming capital allocation update (and likely initial return of capital) should also signal confidence in out-year FCF generation. All-told, we see a compelling setup heading into 2H24, and recommend investors own into DKNG’s Q2 print,” noted the Stifel analyst.

The analyst said a share buyback would likely be DraftKings’ preferred avenue of returning capital to investors and that the operator is unlikely to pursue large-scale mergers and acquisitions and international expansion over the near-term.

State Data Encouraging for DraftKings

While 2024 has been and will likely end to be a dud in terms of state-level expansion of online sports betting and iGaming, that factor is likely priced into sports betting equities. Specific to DraftKings, there is encouraging news in the form of rising market share in some states.

“We continue to see likely upside bias to DraftKings’ core value drivers — in particular user acquisition & monetization. Per state-reported data (see exhibits 1-6), U.S. same-state online sports betting handle growth accelerated to +24%/+29% year-over-year in April/May (vs. +17% Q1) with DKNG gaining market share sequentially in both months (though early June data suggests some reversion),” added Stantial.

The analyst also noted that many new DraftKings clients are likely casual bettors – a demographic prone to lottery-style wagering and thus higher holds for operators.