Analyst Warns of Overblown Contagion Impact from DraftKings' Illinois Sell-Off
DraftKings (NASDAQ: DKNG) stocks dipped slightly today due to news that Illinois will introduce a progressive sports betting tax which could impact the company's revenue significantly.
This could result in DraftKings and FanDuel's parent company, Flutter Entertainment (NYSE: FLUT), having to pay increased taxes of 36% and 37%, up from the current 15% levy. Investors are worried that other states might follow suit, causing more companies to face higher tax rates. However, some analysts think that the risk of this happening is limited.
Stifel analyst Jeffrey Stantial, in a note to clients, acknowledged the growing regulatory challenges but believes the initial pullback overstates the risk of widespread tax increases. He maintains a "buy" rating on DraftKings with a $50 price target, which implies a potential 39% return on investment from today's stock price.
Impact on DraftKings and FanDuel
Although Illinois isn't specifically targetting DraftKings and FanDuel, its new tax policy puts them at a disadvantage due to their large market share in the US online sports wagering industry. As the largest operators, they could be required to pay a higher percentage of their adjusted gaming revenue (AGR) to the state. Smaller competitors may see their tax liability decrease.
"Under the new regime, operators would pay 20% on AGR up to $30M; 25% on $30-50M; 30% on $50-100M; 35% on $100-200M; and 40% on >$200M," Stantial added.
This new tax policy could prompt DraftKings and FanDuel to cut back on their promotional spending in Illinois as they try to adjust to the higher taxes. Marketing expenditure in the state could also be reduced, as companies seek to conserve funds.
Doubting the Impact on Bettors
Industry groups criticized the proposed tax policy, contending that it would affect bettors by making game odds worse. However, some analysts call this argument questionable, pointing out that there is little evidence to support the claim that odds worsen when sports betting tax regimes change. Europe and certain US states are used as examples of this.
"Bottom-line, we see a material, yet manageable, direct impact on DraftKings/FanDuel from the proposed tax system change. We forecast only modest impact for other operators in the state, with the progressive tax system limiting derivative offsets from market share consolidation typically seen with tax rate hikes," concluded the analyst.
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