Shares of DraftKings rebounded on Wall Street on Wednesday morning, spiking as high as $33.50 per share in early trading. The recovery followed the company’s post-trading Tuesday announcement that it was abandoning a planned surcharge on winning bets in selected states.
Jefferies Equity Research analyst David Katz retrospectively dismissed the August 2 surcharge announcement as a “head-fake.” He wrote, “Our view had evolved to consider the notion that the initiative was intended to spark debate and awareness rather than actually recoup margins.” He hewed to his previous Buy writing and $54 per share price target.
Katz recapped the pros and cons of the surcharge argument. Bears, he said, believed that DraftKings management could offset higher tax burdens over time and, by introducing a surcharge on bets, were ceding control of the market to the competition.
Bearish investors also voiced “the notion that an adverse posture against states at the early stage, particularly those where operators are lobbying to pass igaming, would not be beneficial.”
By contrast, surcharge bulls applauded DraftKings as a first mover and for firing a shot across the bows of high-tax states. Although the impost was planned initially only for New York, Illinois, Pennsylvania, and Vermont, DraftKings hadn’t ruled out extending it nationwide.
Like Katz, Truist Securities analyst Barry Jonas was bullish on DraftKings. In a late-Tuesday investor note, he reiterated a Buy rating and $50 price target on the stock.
Jonas wrote, “The reversal should remove some uncertainty around execution risks, but also raises the question of how DKNG can offset the impact and/or if guidance needs to be tweaked.” He continued that the recent doldrums of DraftKings’s share price might indicate that the bear case against surcharges was prevailing, although no longer relevant.
The analyst continued that DraftKings had taken a stand on surcharges two weeks prior, explicitly anticipating that its competitors would rally to its standard. This didn’t happen, with BetRivers, BetMGM, ESPN Bet, and finally FanDuel rejecting the DraftKings idea.
Looking to the near future, Jonas wrote, “We think investors will now focus on other potential offsets to the [Illinois] tax rate increase.” DraftKings didn’t expect a near-term bottom-line boost from its surcharge, projecting the initial results for early 2025.
Jonas suggested that DraftKings might tinker with its odds (or “pricing”) to claw back some of the Illinois levy. However, he observed, “DKNG has less room to do so than FanDuel.” He pointed out that the latter would be counteracting higher taxes with fewer promotions and less localized marketing.
For his part, Jefferies analyst James Wheatcroft opined that high levies might compel FanDuel’s and DraftKings’s smaller competitors to worsen their pricing for bettors. He cautioned that BetMGM and ESPN Bet’s rejections of surcharges were equivocal, tantamount to a wait-and-see stance.
Wheatcroft took no position on FanDuel’s eschewal of surcharges. He wrote, “Instead, Flutter will moderate generosity/local marketing to mitigate increased taxes, taking lessons from its long track record of operating in high tax environments ex-U.S.”
