DraftKings' stock slides 11% after revenue miss, but analysts are still upbeat

By Ciara Linnane

A plan to implement a gaming-tax surcharge in high-tax states next year is 'a gamble in itself,' analyst says

DraftKings Inc.'s stock slid 11% Friday as analysts weighed in on quarterly earnings that showed a profit but revenue that lagged estimates, with most taking a bullish stance on the company's longer-term prospects.

The weakness in the quarter came from "customer-friendly outcomes and higher promotion costs," which were expected by Wall Street, according to Benchmark. The reduction in 2024 guidance, however, "was more significant than we expected," said analyst Mike Hickey.

The Boston-based fantasy-sports-contest and sports-betting company (DKNG) cut its fiscal 2024 adjusted Ebitda guidance to a range of $340 million to $420 million, down from prior guidance of $460 million to $540 million. But it said it still expects to generate adjusted Ebitda of $900 million to $1 billion in fiscal 2025.

"The reaffirmation of fiscal 2025 adjusted Ebitda estimates suggests that near-term headwinds are temporary, and the company should ultimately benefit from strong customer acquisition, retention, and engagement, and bolstered by initiatives like Jackpocket and the launch of OSB (online sports betting) in D.C.," Hickey wrote in a Friday note to clients.

Jackpocket is a lottery app that DraftKings acquired in May.

The analyst has a buy rating on the stock and a $41 price target that's about 15% above its current price.

Hickey sounded a cautious note on DraftKings' plan to impose a gaming-tax surcharge in high-tax states that have multiple mobile sports-betting operators on Jan. 1, 2025, which Chief Executive Jason Robins said could drive adjusted Ebitda upside.

The sports-betting business has come under pressure from states with higher taxes, such as those announced in Illinois in May, as well as from betting scandals, such as the one involving Los Angeles Dodgers star Shohei Ohtani, whose interpreter was accused of stealing nearly $17 million from him to wager illegally, as the Associated Press reported in April.

"The proposed tax surcharge could be a compelling strategic fix, but there is concern that if competitors do not implement similar measures, the company may lose market share to other platforms as players might not appreciate the expense," he wrote.

Truist agreed the surcharge is "a gamble in itself," and predicted correctly it would feature in questions to management on the company's earnings call Friday.

The surcharge, which will only be applied to winning bets, will be applicable in states with multiple OSB operators and tax rates of 20% and above, which include Illinois, New York, Pennsylvania and Vermont, said analysts led by Barry Jonas.

"FanDuel's reaction will likely determine how successful this initiative will be," the analysts wrote in a note to clients. Fanduel, which offers sportsbook, daily fantasy sports, horse racing and an online casino, is owned by Flutter Entertainment (FLUT).

"Other competitors may use this as an attempt to take market share and this will test the DKNG product superiority thesis. And one risk is this surcharge this could embolden more states to follow Illinois and raise taxes, though we could also see the illegal market benefiting which could actually be a deterrent to higher taxes," the analysts wrote.

Truist has a buy rating on the stock and a $53 price target.

Robins told analysts on the call that he expects others to follow DraftKing's lead.

"I think every company has to do what's best for their own business," he said, according to a FactSet transcript. "I think we believe this is what's best for us and I would imagine that, you know, if that's our calculus, then others would come to the same conclusion. But we really don't know."

He noted that while customers may not be happy about the extra fee, it is a nominal sum, "and it makes a huge difference in our ability to make a reasonable margin and more importantly, compete with the illegal market, which pays no taxes."

Stifel analysts welcomed the company's inaugural share buyback authorization, a program for up to $1 billion.

"We believe a repurchase program is consistent with management's prior commentary on DKNG shares being a better investment, in their view, vs. international expansion or large-scale M&A, while also signaling confidence in the ongoing organic free cash flow inflection," said analysts led by Jeffrey A. Stantial.

Stifel reiterated its buy rating on the stock and said it would be a buyer on any weakness, although its model and $50 price target are under review.

The stock is now down 10% in the year to date, while the S&P 500 SPX has gained 14%.

-Ciara Linnane

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08-02-24 1417ET

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