Morgan Stanley Selects DraftKings as Leading Gaming Concept
The stock of DraftKings (NASDAQ: DKNG) experienced a surge on Monday as Morgan Stanley added the company to its list of top gaming and lodging recommendations.
In a report for clients, analyst Stephen Grambling reaffirmed his "overweight" rating for DraftKings while maintaining a price target of $51. This target implies a potential increase of 38.3% compared to the closing price on June 7. The upbeat assessments came as the shares were down by 13.67% since the start of the previous month.
Grambling pointed out that it was encouraging to see DraftKings keep its 2024 projections even amid recent tax news from Illinois. This state recently enacted a new tax scale for sports wagering that hits the top players, such as DraftKings and FanDuel, with an average tax rate of 36.5%, a significant increase from the previous 15% rate. Beginning on July 1, both companies will face this higher level of taxation.
There are hopes that Illinois might eventually legalize iGaming to make up for the tax hike on sports betting, benefiting DraftKings. However, there is still uncertainty as to when or if this will actually occur. Grambling highlighted how the next three years have already passed by half-way through, making it less likely that any states will allow online casinos or sports betting this year.
Unlikely More States to Emulate Illinois' Tax Hikes
Despite the chances of iGaming and sports wagering growth in the US staying lean, there are still some positive signs for the gambling industry. Grambling stated he feels very few states will increase sports betting taxes, especially if New Jersey does not follow suit in its forthcoming budget. This could limit any concerns about Illinois' new tax laws affecting other states. Decent EBITDA and revenue projections could also support near-term stock price gains for DraftKings.
Grambling raised his adjusted EBITDA predictions for FY24-26 from $570 million, $1,306 million, and $2,111 million to $570 million, $1,311 million, and $2,108 million, respectively. He emphasized that his unaltered $51 12-month price target is derived from a 50/50 weighting of a 14x 2026 enterprise value (EV) EV/EBITDA, a discount rate of 13%, a $45 value, and a discounted cash flow of $56 at a 2.5% growth rate, a 9.25% weighted average cost of capital, and leverage of up to 2x, equivalent to around 30% of its EV.
DraftKings is expected to release its second-quarter financials on August 1.
Potential Capital Returns in the Works?
DraftKings has been a public company for around four years, indicating it is still in its formative stages. However, whispers among Wall Street analysts surge that the free cash flow expansion at DraftKings might prompt the company to return capital to its investors in the near future.
Grambling proposed that this might be announced alongside DraftKings' second-quarter earnings, but the company itself has yet to confirm this.
This capital return could come in various forms, such as a buyback, quarterly payout, or special dividend, but analysts hesitate to speculate about the specific method. Introducing quarterly dividends at such an early stage is unusual for businesses like DraftKings.
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