Analysts Back DraftKings Stock Amid Decline
Shares of DraftKings (NASDAQ: DKNG) have dropped 15.06% in the last month, exceeding the definition of a correction and reducing the stock's year-to-date gain to a meager 0.77%. Despite this, some analysts remain positive about the gaming company.
On Tuesday, DraftKings became one of three stocks added to Bank of America's highly respected US 1 List - a collection of the bank's top equity picks among stocks with a 'buy' rating listed on domestic exchanges. To be part of this list, a stock must be based in the US and have an average daily trading volume of at least $5 million in the six months before its selection. The list usually contains between 30 and 40 companies but never fewer than 25. It is updated whenever a stock is added or removed.
Alongside DraftKings, high-performing semiconductor company Nvidia (NASDAQ: NVDA) also joined the US 1 List. Other well-known companies on the list include Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COST).
Explaining the Recent Drop in DraftKings' Shares
The main reason for the dip in DraftKings' shares can be traced back to Illinois, one of the largest sports betting markets in terms of wagering volumes. Illinois recently approved a graduated tax system that places higher levies on the state's top operators, like DraftKings and FanDuel. DraftKings and FanDuel will see their average tax rate in Illinois jump to 36.5% on July 1 from the current rate of 15%. This tax increase can significantly impact their earnings in the state, and there's an ongoing debate about whether or not other states will follow suite.
After Illinois approved the increased tax on sports betting, Massachusetts attempted but failed to raise taxes on sportsbook operators. However, some analysts believe it's just a matter of time before other states follow suit.
Potential candidates for similar tax hikes include New Jersey, a state with friendly iGaming and sports betting policies, and Michigan, where sports betting is legal and online casinos are permitted. These two states are two of the biggest regulated sports betting markets in the US and two of the six states that also allow internet casinos.
How DraftKings Could Cope with Tax Increases
DraftKings and its competitors have some options for mitigating tax hikes, such as reducing marketing and promotional spending in the states imposing the higher taxes. This could help them lessen the financial impact.
"Our takeaway is that there are ways to mitigate the tax impacts, such as adjusting promotional strategies and marketing levels, revisiting market-access strategies," Jefferies analyst David Katz wrote in a client note on Monday.
Katz maintained his bullish stance on DraftKings and raised his price target from $52 to $54. He also suggested that higher sports wagering taxes could motivate DraftKings to push for more state approvals of recently acquired online lottery provider Jackpocket.