DraftKings (NASDAQ: DKNG) got a boost on Monday after Morgan Stanley highlighted the stock as one of its top picks in the gaming and lodging sector. This recognition comes at a crucial time for DraftKings, which has seen its shares dip 13.7% over the past month.
Morgan Stanley’s Bullish Call
Morgan Stanley analyst Stephen Grambling reiterated an “overweight” rating for DraftKings, setting a price target of $51. This prediction suggests a potential 38.3% increase from its closing price on June 7. Grambling’s optimism is notable, especially as DraftKings recently faced a challenging month.
Grambling highlighted that DraftKings’ reaffirmation of its 2024 financial goals, despite a new tax law in Illinois, is a positive sign. Illinois has introduced a graduated tax rate on sports betting, significantly impacting major operators like DraftKings and FanDuel. Starting July 1, these companies will face an average tax rate of 36.5%, up from the previous 15%.
Potential iGaming Expansion
There is speculation that Illinois, following the tax hike on sports wagering, might eventually legalize iGaming, which would be beneficial for DraftKings. However, with 2024 almost halfway over, the likelihood of new states adopting internet casinos or sports betting this year seems slim.
Legislative Landscape
Despite the tough tax environment in Illinois, the broader legislative outlook isn’t all bad for DraftKings. Grambling is confident that other states are unlikely to follow Illinois’ lead in raising sports betting taxes, especially if New Jersey refrains from doing so in its next budget. This could ease concerns about a ripple effect from the Illinois tax hike, potentially supporting short-term gains for DraftKings.
Grambling’s forecasts for DraftKings’ adjusted EBITDA for fiscal years 2024, 2025, and 2026 are modestly revised to $570 million, $1.311 billion, and $2.108 billion, respectively. He maintains a 12-month price target of $51, based on a blend of enterprise value and discounted cash flow analyses.
DraftKings’ Financial Prospects
Based in Boston, DraftKings is set to report its second-quarter results on August 1. There is growing speculation among analysts that the company might announce a return of capital to shareholders soon. This could come in the form of a stock buyback, quarterly dividend, or a special one-off dividend. However, DraftKings has yet to comment on such possibilities.
Looking Ahead
DraftKings, though relatively young as a standalone public company, is already being eyed for its potential to return capital to shareholders. As free cash flow improves, this could become a reality sooner rather than later. Keep an eye on the company’s second-quarter earnings announcement for potential updates.
In summary, Morgan Stanley’s endorsement of DraftKings highlights the stock’s promising prospects despite recent challenges. With strategic moves and a favorable legislative outlook, DraftKings remains a compelling player in the gaming industry.
