DraftKings Shares are a Buy Even as They Trade Lower Than Expected

Last week, DraftKings shares traded lower by 9.5%. However, one Wall Street analyst thinks that investors should be buying the dip, in light of the strong sports betting trend in New Jersey.

Rosenblatt Securities analyst Bernie McTernan repeated his $60 price target and buy rating for DraftKings shares.

The DraftKings Theory

ESPN recently reported that the Big Ten conference, as well as others, are prepared to cancel the fall sports season. That includes college football. McTernan believes that the cancellation of NCAA sports would detrimental to DraftKings, but he also doesn’t see another pro sports shutdown on the horizon.

In spite of the risk, McTernan believes DraftKings has the cash on hand to survive the current state of affairs.

The NBA and MLB have returned to play recently, but with mixed results when it comes to coronavirus protocols. Empty stands and cardboard cut-out fans just don’t feel right. Moreover, so far MLB has canceled 24 games due to coronavirus outbreaks in multiple cities.

McTernan hopes that DraftKings fans will look past the current sports season and consider the potential long-term growth of DraftKings shares, and online sports betting. For example, in New Jersey, online casino games and sports betting revenue was up 120% in the second quarter. That’s nearly double the 65% growth in the first quarter.

McTernan thinks there are at least two good reasons to buy DraftKings shares despite the near-term risks related to the current college sports season:

 

  • State budget deficits related to the coronavirus shutdowns are pushing lawmakers to legalize online sports betting. This creates a positive headline risk.
  • Both online sportsbooks and online casinos are thriving. Sports betting revenue in New Jersey was up 30% in June and online casino revenue was up 123% in the same month.

“The reason to own DraftKings shares right now is the potential positive headline risk created by states legalizing sports betting and online casinos. This move will be to correct worsening state budgets and create strong momentum where legalization has already happened,” McTernan said.

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Oppenheimer Analysts Also Like DraftKings Shares

While the Massachusetts House had already passed an economic stimulus bill that included legalizing sports betting, the Massachusetts Senate rejected the sports betting amendments. The final version of the $455 million economic stimulus bill passed without legalizing sports betting.

Considering the success of sports betting in New Jersey and other states, legalizing it in Massachusetts would have been very positive for DraftKings.

While this is unfortunate for DraftKings and other online sportsbooks, Oppenheimer analyst Jed Kelly thinks Massachusetts could still pass a standalone sport betting bill very soon. Several state lawmakers have been pushing to extend the current session beyond July 31, which could give Massachusetts a few extra months to pass a new online gambling bill.

“We note that Governor Baker is a proponent of legalizing sports betting and two of Massachusett’s neighboring states (Rhode Island and New Hampshire) both offer mobile gambling. Therefore, I think Massachusetts will eventually legalize sports betting. However, when that will be remains uncertain,” Kelly commented.

While Massachusetts fell through, Kelly noted that, “The Illinois Gaming Board gave temporary operating permits to both DraftKings and Fanduel. I think DraftKings will be able to launch in Illinois pretty soon, maybe before Labor Day. Fanduel’s Illinois site is already up and is offering a $50 bonus for early sign-ups. Moreover, DraftKings was running television commercials in the Chicago market recently. With MLB, NBA, and NHL all scheduled to return over the next few weeks, I believe DraftKings launching in the nation’s sixth most populous state during a late summer pro sports calendar will be an incremental positive.”

Oppenheimer has given DraftKings shares a $46 price target and an outperform rating.

Furthermore, in June, DraftKings announced a 14-million share offering, taking advantage of “favorable market conditions.” Company insiders are also selling 19 million DraftKings shares.

DraftKings expected to raise at least $500 million in net proceeds in order to strengthen its balance sheet before more states legalize online sports betting and casinos.

After the company raises this capital, DraftKings will have a war chest of at least $1.1 billion in cash. Over the next three years, DraftKings expects to spend at least $875 million on sales and marketing.

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