California’s Prop 27 Failure Could Be Positive for DraftKings, Says Analyst

Posted on: October 11, 2022, 01:25h. 

Last updated on: October 11, 2022, 01:52h.

DraftKings (NASDAQ: DKNG) stock slumped 13.9% on Monday, performing significantly worse than other gaming names, including sportsbook operators, amid rising concerns that Proposition 27 is heading for Election Day defeat in California.

DraftKings stock
An image for Prop 26 & 27 in California. DraftKings could actually benefit from failure of Prop 27, says an analyst. (Image: YouTube)

In a note to clients today, Oppenheimer analyst Jed Kelly says part of the reason for the Monday slide by DraftKings stock was a Wall Street Journal article. The piece pointed out that operators supporting Prop 27 are slashing television advertising spending amid slack polling data. However, that’s been known for several weeks, prompting Kelly to say he was somewhat surprised by DraftKings’ slide yesterday.

Prop 27 is supported by Bally Bet, Barstool Sportsbook, BetMGM, DraftKings, Fanatics, FanDuel, and WynnBET — companies that have given $169.2 million to a campaign designed to garner support among Californians frustrated with the state’s homeless problem. The competing Proposition 26 is backed by tribal casino groups.

Recent polling data suggest both measures are heading for defeat — an outlook with which Oppenheimer’s Kelly concurs.

DraftKings Could Turn California Lemons Into Lemonade

Kelly notes that defeat of Prop 27 removes a significant bearish overhang on DraftKings stock. That’s because it eliminates the need for the company to potentially raise capital to support spending in the largest state.

That’s critical on multiple levels, not the least of which is that this is an inopportune time for DraftKings to tap capital markets. The company’s choices for raising cash likely boil down to selling corporate debt or issuing more shares, neither of which is appealing.

Investors are hoping Kelly is correct in assuming the gaming operator won’t imminently raise cash. That’s because a bond issue would almost certainly be rated junk, thus carrying a high interest rate. Likewise, investors’ tolerance for dilutive equity sales is wearing thin.

Additionally, it’s possible that if Prop 27 were to pass, not only would tribes fight in court, but DraftKings and peers would engage in  a New York-style promotional battle. They would be expected to  cough up large amounts of cash to win customers. That’s at a time when Wall Street is demanding restrained spending and more visibility on profitability.

Kelly’s California Call

Oppenheimer’s Kelly offers up a pragmatic solution for what will come of regulated sports wagering in California if both Prop 26 and Prop 27 fail on Election Day.

The analyst sees sports betting in the state being pushed out another two or three years, and that the model to be adopted will be similar to states such as Connecticut and Michigan. Those states have heavy tribal casino footprints, but allow mobile sports wagering via tribal partnerships with operators such as DraftKings.

Kelly adds that two or three years out, DraftKings will be in a better financial position to enter California. That’s as the company turns profitable and generates more revenue in the states in which it currently operates.