Yahoo: A Fantasy Sports 'Sleeper' Stock Pick

With the NFL season kicking off this month and the MLB season winding down, September is a big month for fantasy sports. But while fantasy sports is all fun and games, Morgan Stanley analyst Brian Nowak believes Yahoo! Inc YHOO’s entry into the daily fantasy sports market could provide a big boost to Yahoo’s bottom line.

Fantasy world
According to the report, there are more than 40 million fantasy sports players. Traditional fantasy sports leagues last throughout the duration of a sports season. However, Yahoo has recently decided to enter into the world of daily fantasy sports (DFS) for the first time. DFS allows users to choose new teams and participate in new contests on a daily basis. Yahoo will be competing against DFS leaders Draftkings and Fanduel.

Fantasy sports, but very real profits
Yahoo currently enjoys about an 18 percent market share, or about 7.5 million users, in the traditional fantasy sports space. Nowak’s conservative estimates for Yahoo’s entrance into DFS project approximately 4 percent upside to the company’s 2016 EBITDA estimates from DFS alone.

In 2014, Fanduel users wagered an average of $1,433 playing DFS. If only 5 percent of Yahoo's current fantasy sports players participate in the new DFS offerings and wager 25 percent less than Fanduel customers do, the new business should generate $27 million in high-margin revenue for Yahoo.

Valuation
Nowak believes that a well-run DFS business could make a big difference to Yahoo’s core business, which is currently absurdly undervalued in the market. “Given that, by our math, the market is currently valuing Yahoo’s core at a -$2.3 bn equity value, suffice to say a successful DFS business could drive material upside to valuation,” he explains.

Morgan Stanley currently has an Overweight rating on Yahoo and a $51 target for the stock.