DraftKings Ready to Deliver Earnings Catalysts, Says Morgan Stanley

• Stock has a knack for notable post-earnings moves
• Q2 could be best hold quarter in some time

DraftKings (NASDAQ: DKNG) steps into the earnings confessional on Wednesday, August 6, and some market observers are wagering the second quarter could be the first three-month stretch in a while in which the operator delivers impressive hold data.

That could act as a catalyst for the already high-flying stock, particularly after customer-friendly outcomes weighed on results in the fourth quarter and the first three months of this year. That trend is likely to revert to the mean, and the April through June period could be the start of that reversion.

We expect 2Q will likely be the first quarter of hold tailwinds in a while, with DKNG’s actual hold rate moving above structural and provide the company the ability to offset most of the tax (New Jersey/Louisiana taxes) and regulatory headwinds that occurred during the quarter,” notes Michelle Weaver, head of Morgan Stanley’s US Thematic and Equity team.

Sportsbook operators are contending with an array of state-level tax increases this year, with the most onerous being Illinois implementing a levy of 25 cents per wager on the first 20 million bets they book, with that figure doubling to 50 cents once the 20 million threshold is exceeded. The hikes in Louisiana and New Jersey are less burdensome and, to some extent, can be offset by efficient operators, of which DraftKings is one.

DraftKings Stock Has Been in Rally Mode

After slumping mightily in the first quarter and into the second, DraftKings stock has rebounded impressively off its post-Liberation Day lows. The shares are up 10.31% over the past month, a move accounting for about half the stock’s year-to-date gain.

DraftKings’ August 7 earnings call could also represent an opportunity for the company to illuminate analysts and investors regarding upcoming spending plans relating to the late 2025 launch of sports betting in Missouri and the potential renewal of a marketing agreement with the NFL.

The league’s accords with Caesars, DraftKings, and FanDuel expire at the end of the upcoming season, and it’s widely expected Caesars won’t submit a proposal for renewal.

“We look to renewals and terms to come at a more favorable rate, but should highlight the importance of sports betting for the NFL and sports betting companies, in our view,” observed Citizens equity research analyst Jordan Bender in a recent note.

Prediction Markets Possibilities

Amid recent, though unconfirmed, speculation that DraftKings is in takeover talks with prediction markets operator Railbird, that’s likely to be a point of interest on the earnings call — one the company is unlikely to comment on.

“It would not be a public call if companies did not have to answer questions around the roadmap if and when prediction markets are legalized in the United States,” added Bender. “We believe companies are in a wait-and-see mode for the path forward, yet look to be opportunistic if the Commodities Futures Trading Commission (CFTC) rules in favor of the product.”