When DraftKings’s stock dipped Wednesday following a multiplicity of adverse headlines, J.P. Morgan analyst Joseph Greff saw an opportunity for investors to accumulate the stock, to which he gave an “Overweight” rating. DKNG shares were at $48.68 at the time of Greff’s report, before closing Thursday at $45.41.
Wrote Greff, “We fielded a lot of investor feedback on a flurry of negative headlines and our view, as well as general sentiment, is that the decline in DKNG’s stock today largely seems overdone.”
Greff pooh-poohed NCAA President Charlie Baker’s pursuit of a new ban on collegiate proposition-bet wagering, saying such wagers represent “a very low mix of total handle currently and … many states already have some form of restrictive regulations on college betting.” Eleven states didn’t allow it at all, even before the Baker ban proposal.
The purported non-issue was quantified by pointing out that in Ohio, where prop bets were recently nixed by gaming regulators, they represented less than 1.4 percent of total handle last year.
In Illinois, where proposition bets are permitted on teams outside the state, collegiate wagering comprised 14 percent of online handle and six percent of gross gaming revenue at a hold rate of 3.9 percent.
By way of contrast, Greff pointed to betting on Illinois’s professional sports teams and their 86 percent of handle and 94 percent of revenue at a hold of 9.4 percent. Summarized the analyst, “Overall, the data implies a significantly lower parlay mix and prop-betting uptake on college sports and a higher concentration of straight bets (spread, money line, totals).”
Moving on, Greff dismissed Democratic U.S. Sen. Richard Blumenthal’s scrutiny of VIP packages offered by online providers as “more of the same.” Detractors like Blumenthal were characterized as “legislators looking to crack down on customer acquisition and promotions.”
The analyst felt that such moves actually worked to the benefit of DraftKings and rival FanDuel. He explained that they could ride out increased regulation by virtue of their “entrenched” status, superior technology, deep management teams, and years of brand loyalty. Greff said he “would expect DKNG to generate higher margins under this scenario.”
Lastly, Greff turned to New Jersey, where state Sen. John McKeon (D) has filed a bill that would raise the base tax rate on online sports betting from 13 percent to 30 percent. Internet casino revenues would also be taxed at 30 percent, up from 15 percent.
Greff allowed that this, if passed, would be “an incremental negative, given NJ’s top market positioning (and still growing OSB and igaming 15%-20% annually).” Again, he believed DraftKings, which occupies the leading revenue position in the Garden State, had economies of scale it could deploy.
The analyst opined that DraftKings’ cost of customer acquisition, ability to cross-sell online sports betting with igaming, and promotional strategies were such that the company could optimize its New Jersey position, “similar to how it managed Ohio last July.”
Greff offered no comment on yesterday’s announcement of a seven-operator alliance (including DraftKings and FanDuel) to combat problem gambling online. Nor did he weigh in on the possible impact of the Shohei Ohtani scandal.
