DraftKings Sell-Off Could Spell Opportunity, Says Analyst

Posted on: August 5, 2024, 04:00h. 

Last updated on: August 5, 2024, 10:08h.

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

Last Friday, shares of DraftKings (NASDAQ: DKNG) slumped 9.78% after the company unveiled a plan to add a new levy on winning sports wagers in four states with high tax rates.

DraftKings
DraftKings stock is highlighted at the Nasdaq market site. An analyst is bullish on the stock despite its recent sell-off. (Image: Nasdaq)

That slide sent the stock to a weekly loss of 11.79% and the shares entered Monday 35.40% below the 52-week high. A decline of 20% is considered a bear market. Ominous as all that sounds, some analysts believe the recent weakness in the gaming stock could represent a buying opportunity for prescient investors.

In a new report to clients, Stifel analyst Jeffrey Stantial acknowledged skepticism surrounding DraftKings’ surcharge scheme, but added the stock has upside potential.

We share similar hesitation regarding potential consumer backlash to added tax surcharge, though acknowledging rationale vs. more common mitigation strategies,” observed the analyst. “Still, we continue to see a compelling upside bias to out-year estimates, now even further discounted.”

Stantial reiterated a “buy” rating on the shares with a 12-month price target of $48, down from $50, implying upside of 50% from the August 2 close.

Inside DraftKings’ Surcharge Plan

When it delivered its second-quarter earnings report last Thursday, DraftKings told investors it’s planning to launch a small surcharge on winning sports wagers placed by bettors in Illinois, New York, Pennsylvania, and Vermont — four of the states with the highest sports wagering taxes. That levy is slated to go into effect in those states on Jan. 1, 2025.

The news was met with derision in sports betting circles, with some bettors pointing out it amounts to a second tax on top of the vig, while others claimed it’s a sign DraftKings doesn’t care about customers. DraftKings CEO Jason Robins may have compounded those woes when he described clients who could be sensitive to the surcharge as “lower-value customers” in an interview with Sportico’s Eben-Novy Williams.

DraftKings told investors the new tax on winning bets in the quartet of aforementioned states could be accretive to earnings before interest, taxes, depreciation, and amortization (EBITDA), noting that its 2025 EBITDA forecast of $900 million to $1 billion doesn’t include potential benefits from the surcharge. That could bolster the operator’s free cash flow (FCF) position.

“We see a compelling FCF trajectory & upward bias to Consensus estimates, reflecting continued execution on product, healthy same-state handle/gross gaming revenue growth trends, incremental state legalization, structural hold-rate expansion, sustained rationality in market-wide marketing/promos, and newfound fixed cost discipline & scale efficiencies,” added Stantial.

Rough Stretch of News Flow for DraftKings

News of DraftKings implementing the surcharge appeared to take attention away from the operator announcing a $1 billion share repurchase program — its first form of return of capital to investors in more than four years as publicly traded company.

Adding to the stock’s weakness last week was news that the gaming firm is shuttering its nonfungible token (NFT) marketplace and halting the Reignmakers fantasy sports game because of legal issues.

The week prior, DraftKings announced the sale of the Vegas Sports Information Network (VSiN) to that company’s founders. Though terms weren’t disclosed, there’s speculation the gaming company took a loss on the initial purchase price of $70 million.