DraftKings Stock Sentiment Shifting, California Could Be Catalyst, Says Jefferies

Posted on: May 26, 2022, 08:13h. 

Last updated on: May 26, 2022, 09:33h.

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

Positivity is at a premium for DraftKings (NASDAQ:DKNG). But sentiment could be shifting for the better on the beleaguered gaming stock.

DraftKings stock
Jefferies analyst David Katz in a 2020 CNBC interview. He sees reasons to be positive on DraftKings stock. (Image: CNBC)

That’s according to Jefferies analyst David Katz, who came away from recent meetings with DraftKings senior management somewhat upbeat on the shares. He reiterates a “buy” rating and $33 price target on the stock — calls he revealed last week.

Of particular importance for DraftKings investors, owing to the company’s status as a money-losing entity and one with a lengthy time line to profitability, Katz notes the sportsbook operator raising external capital is “not a likely outcome.”

That’s critical on multiple levels, not the least of which is that this is an inopportune time for DraftKings to tap capital markets. The company’s choices for raising cash likely boil down to selling corporate debt or issuing more shares, neither of which is appealing. Investors are hoping Katz is correct in assuming the gaming operator won’t imminently raise cash, because a bond issue would almost certainly be rated junk, thus carrying a high interest rate. Likewise, investors’ tolerance for dilutive equity sales is wearing thin.

For DraftKings, Possible California Catalyst

As Katz notes, California looms as a possible spark for DraftKings stock — sentiment relevant to other online sportsbook operators.

However, things aren’t cut-and-dry for gaming companies in the largest state. In November, voters there will decide on two competing sports wagering propositions — one supported by tribal casino entities, and the other back by commercial operators, including DraftKings.

As is often the case with tribal gaming entities, those in California are balking at the possibility of new competition threatening their turf. While the tribal proposal only provides for in-person sports betting at casinos and a select group of racetracks, that ballot proposition is currently ahead in the polls, and those operators have deep pockets with which to spend in the state’s pricey media markets.

Some analysts are also envisioning a scenario in which both ballot initiatives pass. That could set up a contentious and, more importantly, lengthy legal battle between commercial gaming companies and tribal competitors in California.

Still, Jefferies’ Katz sees the state as a possible catalyst for DraftKings stock, noting California “could be among the most productive thus far given the size and model.”

Focusing on Other New Markets

The analyst says DraftKings’ near-term outlook centers around profitability and cost efficiencies in markets in which it’s established and new market entries.

The company is almost a week removed from debuting in Ontario, Canada. In the US, industry observers and investors are hoping Maryland and Ohio will join the regulated sports betting party in advance of the 2022 football season. But that might be asking too much.

Specific to DraftKings, the investment community will be monitoring the integration of the recently completed Golden Nugget Online Gaming (GNOG) acquisition, and if that deal pays off in terms of increased internet casino market share.