DraftKings Stock Slumps Following Tepid Morgan Stanley Call

Posted on: November 2, 2021, 09:51h. 

Last updated on: November 2, 2021, 11:56h.

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

DraftKings (NASDAQ:DKNG) stock is tumbling Tuesday after Morgan Stanley resumed coverage of the online sportsbook operator with a lukewarm assessment.

DraftKings stock
DraftKings’ headquarters, pictured above. Its stock was hit hard by a Morgan Stanley call. The bank rates the shares “equal-weight.” (Image: Seeking Alpha)

In a note to clients today, analyst Thomas Allen restarts coverage of DraftKings with an “equal-weight” grade and a price target of $53. That is implying upside of about 10 percent from the Nov. 1 close.

We resume coverage of DKNG at EW with a $53 price target. We increase our total US sports betting/iGaming TAM (total addressable market), but believe we are relatively in line with consensus. Hence, we see the key near-term driver for the stock as market share and signs of long-term profitability, where we see both near-term upside & downside risks,” said Allen.

DraftKings currently isn’t profitable, and concerns about when that will change have been on investors’ minds for some time. Consensus wisdom holds that the company will turn profitable on earnings before interest, taxes, depreciation and amortization (EBITDA) basis around 2023. But there are dissenting voices, with at least one analyst saying that won’t happen until 2025.

Morgan Stanley Still Bullish on iGaming, Sports Wagering

Despite the tepid commentary on DraftKings stock, Morgan Stanley remains enthusiastic on the broader iGaming and sports wagering industries.

The bank boosts its 2025 revenue forecast for those segments to $18 billion from $16 billion to account for the recent legalization of online sports wagering in Florida — the third-largest state — and North Carolina. However, the bank acknowledges that estimate is affected by Texas — the second-largest state — not being included.

For now, sports wagering in Florida appears as though it will largely be controlled by the Seminole Tribe, which owns Hard Rock International. It’s also possible that if California voters approve sports betting in November 2022, that state’s tribal gaming operators will dominate the landscape, and it will be three years before online betting is allowed. Morgan Stanley sees encouraging signs for operators in other states, however.

“It is clear that the US will likely see unprecedented levels of iGaming spend/capita,” said Allen, highlighting momentum in Michigan, New Jersey, and Pennsylvania.

DraftKings Stock Dinged Another Way

In a minor case of adding insult to injury, though not intentionally, Morgan Stanley restarts coverage of Entain Plc (OTC:GMVHY) with an “overweight” rating. That’s a more compelling endorsement than it gives to DraftKings.

DraftKings previously pursued Entain in what would have been the sports wagering industry’s largest takeover on record.  But the two parties announced last week the talks have ended.

Morgan Stanley analyst Ed Young highlights Entain’s attractive inorganic and organic growth opportunities while noting DraftKings’ run at the Ladbrokes owner underscores high scarcity value. Entain is a 50/50 partner with MGM Resorts International (NYSE:MGM) on the BetMGM venture.