Jefferies Equity Research analyst David Katz met with executives of DraftKings on Monday and found them “bullish,” despite last week’s tax increase in Illinois.
Katz thought the tax hike would reduce DraftKings’s revenue and cash-flow estimates initially, but those “should be grown over and mitigated, in our view.” He expected growth in other areas to mitigate the Illinois impact, specifically, “state legalizations, product development, international expansion, and acquisitions such as Jackpocket. In short, we view the recent weakness as a buying opportunity.” He raised his price target to $54 a share, a 52 percent premium in terms of the trading price at the time.
He observed that, following the higher levy in Illinois, the market feared “contagion” spreading to other states. DraftKings shares fell 14 percent as a result.
But Katz wrote, “Our impression is that there are ways to mitigate tax impacts, such as adjusting promotional strategies and marketing levels, revisiting market-access strategies.” These changes would be gradual, he wrote, so as not affect players’ experiences or the pace of business.
DraftKings management was said to be watching taxes in New Jersey and Michigan “and is circumspect about the prospects for other increases over time, but is not bracing for any near-term events.”
Recent support for sports betting from Texas Gov. Greg Abbott has the gaming sector feeling “optimistic” about eventual legalization in the Lone Star State, but the analyst cautioned about the possible coupling of online sports betting (OSB) with casino legitimization, “which is inherently more complex and challenging.”
Although Florida is currently the exclusive province of the Seminole Tribe where OSB is concerned, DraftKings executives professed themselves to be interested in the Sunshine State and “open to a range of paths toward opportunities.”
Execs also said they were keeping an eye on the prospect of federal regulation of sports betting. However, they didn’t think it would be taken up anytime soon.
Looking ahead, lottery provider Jackpocket was said to be “incentivized to launch in new states and is expected to be going live in new jurisdictions in the near term.” Other causes for DraftKings to be upbeat were record March revenues and “strong organic trends.”
Another near-term prospect was the enhancement of prop-betting options for in-game wagering. Opined Katz, “Providing seamless in-game betting would be a key product differentiator which would lead to incremental customers and volume upside.”
Overseas opportunities were characterized as a low DraftKings priority. Although there are opportunities in Brazil and Latin America, the company is cautious, given the lack of a daily fantasy sports legacy in those nations. Language differences were also a reason to act conservatively.
