DraftKings, Penn National Downgraded by Morgan Stanley, Bank Cites Valuation, NFL Risk

In a rarity for sports betting equities these days, not one, but two beloved names suffered downgrades in a single day. Morgan Stanley’s Thomas Allen lowered his ratings on DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN) to “equal weight” from “overweight.”

Allen, one of the most widely followed gaming analysts on Wall Street, cites a valuation along with six macro risks that could hinder upside for shares of the companies. Both stocks have rapidly been bid higher this year amid the return of traditional sports, and anticipation that more states will embrace legitimate sports wagering. Shares of DraftKings are up 265 percent year-to-date, while Penn National is higher by 115 percent.

DKNG and PENN have both more than doubled since the start of the year. While we think a lot of the increased value is valid, we are concerned investors’ expectations are too high, and see 6 potential negative catalysts through the end of the year,” said Allen in a note to clients.

Even with the downgrades, Allen lifted his price targets on both names, boosting his forecast on DraftKings to $37 from $26 while increasing his Penn estimate to $55 from $49. DraftKings currently trades around $37, while the $55 projection implies a modest upside for Penn.

Long List of Concerns

Noting that investors’ expectations for both companies are “too high,” the Morgan Stanley analyst outlines six potential negative catalysts that could weigh on the two stocks.

If the NFL season is shortened or lost outright, that would also be a drag on Penn, because the company is targeting a September debut of its Barstool Sports betting app, meaning the 2020 football campaign will be a pivotal proving ground for that product. The NFL is intent on playing this year. Football is the most wagered-on sport in the US.

Allen’s other concerns include reversal of the stay-at-home trend that’s propelling online gaming equities, lower demand due to gamblers losing federal stimulus benefits, increasing industry competition, disappointment on the state legalization front, and, specific to DraftKings, expiration of the lockup period, which could spark a spate of insider selling.

All About Football

The analyst says long-term COVID-19 implications are minimal but adds that “It is clear from recent volatility that DKNG/PENN will likely react, depending on whether the NFL season happens or not.”

Allen also points out that the debut of the aforementioned Barstool app is a potential risk for both DraftKings and Penn.

“From [Penn National’s] perspective, we are concerned that the app is not as successful as hoped. From [Draft Kings’] perspective, we are concerned that Barstool is more successful than expected, potentially taking share away,” said the analyst.

Currently, DraftKings and rival FanDuel combine to control approximately 62 percent of the US online sports wagering market.