DraftKings Hit with Rare ‘Sell’ Rating as Roth Capital Prefers Penn, Rush Street Interactive

Posted on: October 12, 2021, 09:17h. 

Last updated on: October 12, 2021, 02:32h.

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

Wall Street analysts are broadly bullish on DraftKings (NASDAQ:DKNG) stock. But Roth Capital’s Edward Engel is among the dissenting voices.

DraftKings stock
People walk past a sign for DraftKings in New York Times Square. In a rarity, an analyst hits DraftKings with a “sell rating.” He’s bullish on some of the company’s rivals, though. (Image: Via News)

In new coverage of multiple gaming names today, the analyst tags DraftKings with a “sell” rating and a $41 price target. That implies a downside of about 16 percent from the Oct. 11 close. Engel’s call comes as shares of the online sportsbook operator are off 21.74 percent over the past month.

The analyst’s bearish view on DraftKings revolves around two primary points: The increasingly competitive nature of the domestic sports wagering landscape, and waning benefits from converting daily fantasy sports (DFS) customers into sports betting clients.

We don’t believe DraftKings’ 20 percent to 25 percent market share is sustainable, as mid-tier peers ramp customer acquisition and better cross-sell land-based databases,” said the analyst. “While we believe an industry-leading product creates some market share advantages, we see advantages from DFS fading over time and DraftKings losing market share, particularly in iGaming.”

Prior to Engel’s call, 26 analysts covered DraftKings — 18 of which have bullish or very bullish ratings on the stock. His price forecast is well below the Wall Street average of $70.11.

DraftKings, Other Big Players Vulnerable to Competition

FanDuel, BetMGM and DraftKings – the top three online sportsbook operators in the US — enjoy enviable brand recognition. But Engel believes the market is ripe for other players to gain market share.

“While we’re bullish on US online gaming, we don’t believe 70 percent market share for the three leaders (FanDuel, BetMGM, DraftKings) is sustainable, and see DraftKings conceding market share as mid-tier operators ramp customer acquisition and better cross-sell legacy casino customers,” said the analyst.

One of the contenders that could pilfer market share from the big three is Penn National Gaming (NASDAQ:PENN), which operates the Barstool Sportsbook. Penn doesn’t spend as much on marketing and customer acquisition as its aforementioned rivals do. Rather, it leverages Barstool Sports personalities and its established media footprint to generate sports wagering business while it’s using its myChoice customer loyalty program to bolster its online casino market share.

“We believe Barstool and myChoice offer the most efficient and complementary customer acquisition channels in Online Gaming. While investors are concerned with Penn’s ability to bring Online Sports Betting technology in-house, we see an opportunity to adapt a hybrid model where Penn leverages an evolving ecosystem of highly specialized risk and trading functions from emerging third-party B2B service providers,” said Engel.

The analyst has a $107 price target on Penn, implying 40 percent upside from the Oct. 11 close. Penn is also pulling expansion levers. In August, the operator said it’s paying $2 billion in cash and equity to acquire Canada’s Score Media and Gaming (NASDAQ:SCR). Last month, it revealed a 6.27 percent stake in Australia’s PointsBet (OTC:PBTHF).

Bullish on Rush Street Interactive, Too

Another name Roth’s Engel likes in the iGaming space is Rush Street Interactive (NYSE:RSI).

The analyst calls RSI the most attractive opportunity in the domestic business-to-consumer internet gaming arena. He rates RSI a “buy” with a $24 price forecast. That’s about 20 percent higher than where the shares closed on Monday.

The stock is on a torrid pace, soaring more than 80 percent over the past 90 days as speculation intensifies its takeover target.