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Morgan Stanley maintains target on DraftKings shares, reiterates top pick

EditorEmilio Ghigini
Published 2024/06/10, 12:10

On Monday, Morgan Stanley reaffirmed its positive stance on DraftKings Inc. (NASDAQ: NASDAQ:DKNG) shares, maintaining an Overweight rating and a $51.00 price target. The endorsement comes despite recent concerns regarding the impact of Illinois' transition to a higher, progressive tax structure on the gaming industry.

The firm's analyst emphasized that tax hikes in the gaming sector do not necessarily translate into direct proportional effects on margins, and such increases should not be automatically expected to replicate across different markets.

DraftKings has been reinstated as Morgan Stanley's Top Pick in the North American Gaming & Lodging sector. The decision is backed by several factors that are anticipated to mitigate the recent negative sentiment stemming from tax-related news.

Firstly, there is an expectation of a capital return announcement during the second quarter financial report, as free cash flow (FCF) is projected to rise. Additionally, the firm anticipates DraftKings to reiterate its financial guidance despite the challenges posed by the Illinois tax changes, which suggests confidence in robust market growth and a balanced promotional environment.

The analyst also pointed out that the current year is likely to see minimal new legislation affecting the sector, which could act as an indirect positive influence. This is particularly relevant in the case of New Jersey, should it decide not to include gaming taxes in its June budget. Furthermore, the analyst highlighted that FLTRF remains their preferred choice in the European Leisure & Hotels category.

DraftKings' resilience in the face of regulatory headwinds and its expected positive financial developments have contributed to Morgan Stanley's optimistic outlook. The company's ability to maintain its guidance in spite of tax challenges from Illinois is seen as a testament to the underlying strength and expansion of the market, as well as the effectiveness of its promotional strategies.

In other recent news, DraftKings Inc. has been in the spotlight due to several financial and strategic developments. Analyst firm Susquehanna recently maintained a Positive rating on DraftKings, but lowered the shares target to $49 from $56 in light of increased full-year revenue and EBITDA estimates for 2024 through 2026.

This adjustment accounts for stronger than anticipated industry growth and the recent acquisition of JackPocket. The revised 2024 revenue and EBITDA projections stand at $5.03 billion and $485 million respectively, marking a 4% increase in revenue and a 1% decrease in EBITDA compared to previous estimates.

Further, DraftKings is implementing strategic initiatives to close the online sports betting structural hold gap with FanDuel and enhance user retention rates. The JackPocket acquisition is expected to boost user growth and cross-promotion with its iCasino offerings. Despite a reduction in the price target to $49 due to concerns over potential state tax increases, Susquehanna reiterates its positive stance on DraftKings' shares.

On the other hand, Stifel adjusted its price target for DraftKings shares to $50, a decrease from the previous $51, in response to recent legislative developments in Illinois. Despite this, Stifel believes the impact on DraftKings' future earnings estimates should be minimal.

Meanwhile, BMO Capital maintained an Outperform rating and a stock price target of $54.00 for DraftKings, showing confidence in the company's long-term prospects despite potential challenges from new tax legislation in Illinois. These are among the recent developments for DraftKings.

InvestingPro Insights

Adding to Morgan Stanley's positive outlook, InvestingPro offers valuable insights into DraftKings Inc. (NASDAQ: DKNG). Analysts are projecting a brighter financial future for the company with an anticipated increase in net income and sales growth in the current year. This aligns with Morgan Stanley's expectation of a rise in free cash flow and the company's confidence in maintaining its financial guidance. Moreover, DraftKings is expected to turn profitable this year, which is a significant milestone that may reassure investors about the company's trajectory.

From a market perspective, DraftKings has a substantial market capitalization of $17.88 billion, indicating its significant presence in the industry. The company has experienced impressive revenue growth of 57.0% over the last twelve months as of Q1 2024, further supporting the optimism for its financial performance. While the stock has exhibited volatility and has seen a decline over the last month, its year-to-date price total return stands at 4.65%, highlighting potential for recovery.

For those interested in deeper analysis, there are additional InvestingPro Tips available that cover various facets of DraftKings' financial health and market performance. By using the promo code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription to access these insights.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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