A longtime skeptic of online-gaming valuations and of DraftKings in particular, Deutsche Bank senior analyst Carlo Santarelli saw light at the end of the DraftKings tunnel in a research note released today. However, Santarelli moved neither his price target ($15 a share) nor his “Hold” rating. DKNG shares traded at $17.48 a share at the time of Santarelli’s report.

“While the stock is likely to ebb and flow with quarterly results and bigger-picture equity and igaming-market news flow, we see shares as largely range-bound for the time being,” Santarelli wrote. To this end, he noted DraftKings’s efforts to curb promotional costs and improve its prospects for profitability, all of which “will go a long way toward narrowing the goal posts around the range-of-outcomes debate.”

Santarelli cited four drivers for a bull case on the stock, starting with a general cooling-off of the promotional wars in the digital-gambling sphere. He also pointed to incremental gains by DraftKings in both icasinos and online sports betting (OSB), “in part due to competitor promotions curtailing and solid customer-retention efforts.”

In terms of capital, DraftKings was described as “well positioned,” thereby differentiating it from many of its peers.

Lastly, Santarelli noted “fruitful” DraftKings plans to tighten hold percentages, particularly on parlay wagers. He did, however, question “whether operators beat customer for more, or simply beat them faster, and potentially hamper the entertainment experience.”

For the skeptics in the audience, Santarelli reported that “with easing promotional intensity, we are seeing a direct impact on handle, thereby taking some steam out of the future TAM [total addressable market] projections, something we have noted for some time.” Also, unlike its igaming side, Santarelli described DraftKings’s OSB operations as overly exposed to low-margin customers, which is likely to have a corresponding effect on the company at maturity — especially relative to its competitors — barring a shift in the DraftKings casino/OSB balance.

Also, the legislative calendar for 2023 is unlikely to yield more than one new market for OSB and “of modest size” at that. Santarelli also expected a lower-than-forecast first quarter of this year, thanks to the cost of launches in Ohio and Massachusetts, then improving in the second quarter.

Getting back to the issue of promotional giveaways, Santarelli observed, “We have always recognized, and warned, that as promotions were removed, GGR and handle metrics would skew lower, thereby rendering per capita forecasts, that were based on these metrics, somewhat aggressive.” While promotions were “exiting the system,” thanks primarily to brick-and-mortar operators, growth in handle and revenue were also starting to fade.

“In the 1Q23 to date, promotions remain tame and continue to trend lower on a year over year basis,” Santarelli continued. He cited promotional outlays relative to revenue in Connecticut, Colorado, Michigan, and Pennsylvania as evidence.

“While promotional extraction is an undoubted positive, now that the market better understands the frivolous nature of GGR [gross gaming revenue] and TAM derived from GGR, there are implications from the changing behavior. For example, we believe the extraction of promotions is one of the main drivers of the slowing handle growth,” wrote the longtime critic of measuring digital performance via handle and TAM. He pointed to handle declines in Michigan, flattening in New York, and slowing in Tennessee.

“One can say this is a positive,” Santarelli concluded, “as it pertains to DKNG, as there remains wood to chop, though we think the path to parity will be challenged and will almost surely result in greater churn than DKNG is currently experiencing. That said, we have been surprised by the resilience to date of FanDuel market share, despite the higher than peer holds.”