DraftKings Stock Gains Analyst Support Amid Slump

Posted on: June 4, 2024, 05:54h. 

Last updated on: June 5, 2024, 10:28h.

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

Shares of DraftKings (NASDAQ: DKNG) are off 15% over the past month, far exceeding the definition of a correction while paring the stock’s year-to-date gain to a meager 0.77%. Still, some analysts remain supportive of the gaming stock.

DraftKings
Employees at DraftKings headquarters. Some analysts are defending the stock amid a recent slump. (Image: CNBC)

On Tuesday, DraftKings was one of three stocks added to Bank of America’s widely followed US 1 List, a collection of the bank’s best equity ideas among buy-rated names trading on domestic exchanges.

To be included in the list, stocks must be listed in the US and must have an average daily trading volume of at least $5 million in the six months preceding their selection for the list. The list will generally consist of between 30 and 40 stocks, but not less than 25 stocks. The list is rebalanced each time a stock is added or removed. The US 1 List has outperformed the S&P 500 Index over the last year, per independent tracking,” according to Seeking Alpha.

Joining DraftKings in being freshly included on the Bank of America US 1 List is high-flying semiconductor giant Nvidia (NASDAQ: NVDA). Those two stocks join a prestigious group that already includes Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COST), among others.

Understanding DraftKings’ Recent Weakness

Much of the recent weakness in DraftKings shares stems from Illinois, one of the largest sports betting states by handle, approving a graduated tax on gaming companies that imposes higher levies on the biggest operators in the state.

DraftKings and rival FanDuel will bear the brunt of those increases as their average tax rate in Illinois will surge to 36.5% on July 1 from the current level of 15%. That tax hike could be a significant drag on those operators’ earnings in the state and analysts are divided on whether or not Illinois could inspire other states to follow suit.

Soon after the Illinois sports betting tax increase was approved by the State Senate, Massachusetts tried and failed to boost levies on sportsbook operators. Some analysts believe it’s only a matter of time before other states also raise taxes on online sportsbooks.

New Jersey, which has a friendly iGaming and sports betting tax policy, and Michigan, have been mentioned as potential candidates to raise related taxes. Those are two of the biggest regulated sports betting markets in the US, and two of the six states that permit internet casinos.

DraftKings’ Mitigation Avenues

DraftKings and rivals have some avenues for mitigating tax increases, including reducing marketing and promotional spending in the states imposing those hikes.

Our impression is that there are ways to mitigate tax impacts, such as adjusting promotional strategies and marketing levels, revisiting market-access strategies,” wrote Jefferies analyst David Katz in a Monday note to clients.

Katz said he remains bullish on DraftKings and lifted his price target on the stock to $54 from $52. He added that higher sports wagering taxes could be an impetus for DraftKings to push for more state approvals of recently acquired online lottery provider Jackpocket.