Stock of Draftkings Slides 5% After Revenue Misses, but Analysts Are Still Optimistic

DraftKings Inc. saw its stock drop 5% early Friday as analysts responded to the company's quarterly earnings report, which revealed a profit but revenue that fell short of expectations. Despite this, many analysts remain optimistic about the company's long-term potential.

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According to Benchmark, the quarter's weakness was due to "customer-friendly outcomes and higher promotion costs," which Wall Street had anticipated. However, the reduction in 2024 guidance was more significant than expected, noted analyst Mike Hickey.

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The Boston-based fantasy sports contest and sports betting company lowered its fiscal 2024 adjusted EBITDA guidance to a range of $340 million to $420 million, down from the previous range of $460 million to $540 million. Despite this, DraftKings still expects to generate adjusted EBITDA of $900 million to $1 billion in fiscal 2025.

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Hickey noted that the reaffirmation of fiscal 2025 adjusted EBITDA estimates suggests that the near-term challenges are temporary. He believes the company will ultimately benefit from strong customer acquisition, retention, and engagement, as well as initiatives like Jackpocket and the launch of online sports betting (OSB) in Washington D.C.

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Jackpocket, a lottery app, was acquired by DraftKings in May. Hickey maintains a buy rating on the stock with a $41 price target, about 15% above its current price.

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Hickey also expressed caution regarding DraftKings’ plan to implement a gaming-tax surcharge in high-tax states with multiple mobile sports-betting operators starting January 1, 2025. CEO Jason Robins suggested this could boost adjusted EBITDA, but Hickey is concerned that if competitors do not follow suit, DraftKings might lose market share.

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The sports-betting industry is under pressure from states with high taxes, such as Illinois, which announced higher taxes in May. Betting scandals, like the one involving Los Angeles Dodgers star Shohei Ohtani’s interpreter, who was accused of illegally wagering nearly $17 million, have also impacted the sector.

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Hickey noted that while the proposed tax surcharge could be a strategic fix, there is a risk that if competitors do not adopt similar measures, DraftKings could lose market share as players might not accept the additional cost.

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Truist analysts agreed that the surcharge is "a gamble in itself" and predicted it would be a topic of discussion during the company's earnings call. The surcharge will apply only to winning bets in states with multiple OSB operators and tax rates of 20% and above, including Illinois, New York, Pennsylvania, and Vermont.

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Analysts led by Barry Jonas indicated that the success of this initiative would likely depend on FanDuel's reaction. FanDuel, which offers sportsbook, daily fantasy sports, horse racing, and an online casino, is owned by Flutter Entertainment. Other competitors might use this opportunity to gain market share, testing DraftKings’ product superiority. There is also a risk that more states might follow Illinois' example and raise taxes, potentially benefiting the illegal market and deterring higher taxes.

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Truist maintains a buy rating on DraftKings stock with a $53 price target.

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Stifel analysts welcomed DraftKings’ inaugural share buyback authorization, which allows for up to $1 billion in repurchases. They believe this program aligns with management's view that DKNG shares are a better investment than international expansion or large-scale mergers and acquisitions. The buyback program also signals confidence in ongoing organic free cash flow.

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Stifel reiterated its buy rating on the stock and advised buying on any weakness, although it is reviewing its model and $50 price target.

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Year-to-date, DraftKings stock is up 0.7%, while the S&P 500 has gained 14%.

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