Even though DraftKings' (NASDAQ: DKNG) stock has lost 18.29% over the last ninety days, some sell-side analysts are still optimistic about the company despite the nearly 1% closing loss today.
The company is a great choice for the second half of 2024, according to a note sent to investors today by Stifel analyst Jeffrey Stantial, who gave DraftKings a "buy" rating with a $50 price target, indicating a 34.8% increase from the closing price today. He said that the shares are pricing into headwinds like the recently enacted tax hike in Illinois.
"We see well-discussed headwinds to 2Q24/2024E Consensus (IL tax hike; Jackpocket drag) as de-risked following recent revisions, with healthy core growth drivers (evidenced by recent state reported GGR Trends) posing potential upside to reset buyside expectations,” wrote the analyst.
The biggest sportsbooks in the state are now required to pay greater percentages after Illinois passed a tiered tax rate for online sports betting companies. Illinois now has the second-highest sports betting taxes in the nation as a result of the plan, which went into effect on July 1. The rate for large operators like DraftKings and FanDuel parent company Flutter Entertainment (NYSE: FLUT) probably more than quadrupled.
Stifel advises concentrating on DraftKings' free cash flow
DraftKings is expected to release its second-quarter results on August 1st, based on historical reporting trends. Free cash flow is one of the main topics that analysts and investors will be keeping an eye on.
Despite having a negative free cash flow, the gaming company has achieved great progress in the last three quarters. According to Macrotrends statistics, the operator's free cash flow was negative by $103.03 million last year, but it was a significant improvement over the -$721.95 million reported in 2022.
DraftKings is still a relatively young company, having just been publicly traded for four years or so. Nonetheless, there is growing discussion among sell-side analysts that a return of money to shareholders may be announced soon due to the gaming company's free cash flow. Stantial thinks that may happen.
“DKNG’s forthcoming capital allocation update (and likely initial return of capital) should also signal confidence in out-year FCF generation. All-told, we see a compelling setup heading into 2H24, and recommend investors own into DKNG’s Q2 print,” noted the Stifel analyst.
According to the analyst, DraftKings is unlikely to seek significant mergers and acquisitions or foreign expansion in the near future, and a share buyback would probably be the company's favored method of giving investors their money back.
Encouragement of State Data for DraftKings
Even if 2024 has been and probably will be a bust for the state-level growth of iGaming and online sports betting, that reality is probably factored into sports betting stocks. Regarding DraftKings specifically, there is positive news in the shape of increasing market share in certain states.
“We continue to see likely upside bias to DraftKings’ core value drivers — in particular user acquisition & monetization. Per state-reported data (see exhibits 1-6), U.S. same-state online sports betting handle growth accelerated to +24%/+29% year-over-year in April/May (vs. +17% Q1) with DKNG gaining market share sequentially in both months (though early June data suggests some reversion),” added Stantial.
The analyst also pointed out that a large number of new DraftKings customers are probably casual gamblers, a group that is more inclined to wager like a lottery and, as a result, increase holds for operators.
