The stakes are high for DraftKings (DKNG) as it faces the prospect of other U.S. states following the lead of Illinois, New York, New Hampshire and Ohio in heavily taxing online sports betting companies. Despite concerns over where states will go on the issue, DraftKings — today’s pick for IBD 50 Stocks to Watch — is approaching yet another buy point for investors to watch.
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DraftKings stock took a hit May 28, shortly after the Illinois state Senate approved a 140% hike in taxes for online sports bets. But the 10.3% drop in shares that day didn’t prove to be fatal as it led to the stock forming a double-bottom base with a buy point of 46.29.
The stock has posted gains in 10 of the last 12 sessions. It was on its way to more gains Thursday, with shares up 0.4% at midday.
Investors should be wary, however, because this latest base is third-stage, making the odds a bit more difficult for a meaningful jump to new highs. DraftKings also is working on its second double-bottom base in the last seven months. It has formed four bases overall in the last 15 months.
How Online Betting Taxes Affect DraftKings Stock
Illinois raised online betting taxes from a flat rate of 15% to a sliding scale of 20% to 40%. That followed an action by the Ohio legislature to raise its tax rates on online betting to 20% from 10%. New York and New Hampshire initiated their programs with tax rates of 51%.
“Given (Illinois’) budgetary issues, its governor has been discussing raising taxes for some time. As such, the proposed tax increase should not be a complete surprise to investors,” Truist analyst Barry Jonas said in a note to clients.
Now the question is whether other states will look at Illinois and consider reaping more benefits from online gaming. DraftKings has said it doesn’t expect more than a couple of states to follow suit.
The Bright Side For DraftKings
But there is a bright side for DraftKings stock, according to Jonas. The Illinois move could prompt other states to legalize online sports betting.
“Despite slower-than-expected progress, we are still of the view that iGaming is an inevitability for many states given the sizable tax contributions they (gambling sites) can offer,” said Jonas.
Needham analyst Bernie McTernan agrees. In a June 12 note, he said: “Our math suggests there is a greater tax revenue opportunity for states to legalize iGaming as opposed to increasing the (online sports betting) tax rate.”
McTernan went on to say: “We see (DraftKings) as a leader in the emerging North America online gambling market, a $35 billion market opportunity. We think the legislative environment is overall supportive of greater market access as it’s a win-win for consumers and states.”
Heading Into Profit Zone
Boston-based DraftKings competes primarily with FanDuel, owned by Flutter Entertainment (FLUT), in the online gaming market. FanDuel is considered to have a larger market share by several percentage points, though estimates vary.
Other online sports betting outfits are looking to move up in the market, including MGM Resorts‘ (MGM) Bet MGM and Walt Disney‘s (DIS) ESPN Bet.
Within the last year, DraftKings finally moved into the black after many quarters of losses. More profits are seen in coming quarters. Wall Street, however, foresees a possible deficit in the company’s third quarter.
In a June 5 note, Susquehanna Financial analyst Joseph Stauff increased his full-year estimates on DraftKings stock. He cited stronger-than-expected industry growth and the company’s acquisition earlier this year of JackPocket, a provider of digital lottery services. He gave the company a positive rating but did lower his price target on shares to 49 from 56.
“We reiterate our Positive rating and lower our (price target) to $49 to reflect now lower multiples associated with the fear of state tax contagion and its impact on the outlook for each state’s profitability curves,” Stauff said.
DraftKings holds a Relative Strength Rating of 91 out of a possible 99 from Investor’s Business Daily. Its Composite Rating is 84 and its Earnings Per Share Rating is 80.
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