DraftKings Gets Morgan Stanley Endorsement Ahead of Earnings

Posted on: August 13, 2020, 12:04h. 

Last updated on: August 13, 2020, 12:48h.

DraftKings joined the parade of sports betting equities trading higher Thursday, rallying on the back of bullish commentary by Morgan Stanley analyst Thomas Allen.

MorganStanley Bullish, Lifts DraftKings Stock
DraftKings gets a lift from Morgan Stanley analyst Thomas Allen, who sees potential for increased market share. (Image: Barron’s)

Allen, one of the most noted gaming analysts on Wall Street, raised his third- and fourth-quarter revenue estimates on DraftKings in a note to clients Thursday. He said the company is poised to benefit from a fuller-than-usual July through September sports slate.

The concentrated MLB, NHL, and NBA seasons and increased number of games in 3Q, as well as the ramp-up of new states and stay-at-home benefits, will support iGaming, Allen told clients.

In a normal operating environment, MLB would be the only game in town among the “big four” professional sports leagues in July and for most of August. It would stay that way until NFL pre-season games arrive, because the NBA and NHL seasons typically conclude in June. But owing to the coronavirus pandemic, the 2020 sports calendar is anything but normal.

Positive Signs Emerging

Earlier this week, DraftKings and other sports betting equities slumped on news that the Big 10 and PAC-12 are postponing their college football seasons. The PAC-12 went even further, saying all fall sports, including non-conference basketball, will be delayed at least until January, That stirred speculation that bettors and operators could go a second consecutive year without the NCAA Tournament, one of the most wagered-on events in the US.

Although it’s now certain there will be fewer college football games to wager on this year, and NCAA hoops appear to be hanging in the balance, Wall Street is growing enthusiastic about the outlook for sportsbook operators.

Morgan Stanley’s Allen boosted his third- and fourth-quarter revenue forecasts on DraftKings to $128 million and $189 million, respectively, from $108 million and $185 million. Wall Street consensus is $125.4 million for the current quarter and $199.3 million for the October through December period.

The analyst did, however, widen his current quarter, fourth-quarter, 2020, and 2021 earnings before interest, taxes, depreciation and amortization (EBITDA) loss estimates on DraftKings, citing increased promotional spending.

The Boston-based company reports results for the June quarter Friday before the open of US markets. Allen expects a loss of 19 cents a share on revenue of $66.4 million.

Bullish, But Cautious

Allen also cited new states, namely Colorado and Illinois, recently joining the sports betting party as potential catalysts for DraftKings. The company is operational in both states.

Many analysts are overtly bullish on the company, and that’s not to say Allen isn’t. But his $26 price target, up from $25, is below the average of $47, and far-off the $35 handle at which the name currently trades.

The analyst rates DraftKings “overweight,” and said he’s “increasingly confident in the higher market share, which alone could drive our price target to $35-$40, depending on margins.”

A dozen analysts cover the name, with 10 rating the company the equivalent of a “buy,” and two with “hold” grades.