A battle between DraftKings Inc DKNG bulls and bears could come down to EBITDA, surcharges and competition, an analyst says after the company and rival Flutter Entertainment FLUT have both now reported second-quarter financial results.
The DraftKings Analyst: Needham analyst Bernie McTernan reiterated a Buy rating on DraftKings with a $60 price target.
The Analyst Takeaways: DraftKings could be a battleground stock now due to several items, McTernan said in a new investor note after meeting with company Chief Financial Officer Alan Ellingson.
"The greatest bifurcation between the bulls and bears in our conversations was on ‘25E adj. EBITDA targets, the high tax surcharge and competition," McTernan noted.
The analyst said the total addressable market size for U.S. online sports betting is larger than originally expected, which is being used as a bear case negative for DraftKings.
"We suspect DKNG has multiple levers to pull to hit their current ‘25E adj. EBITDA guidance while the market appears to be pricing in another round of estimate revisions given the discounted valuation."
McTernan said bulls could see Flutter's lower promotions in Illinois as a potential win for DraftKings, who could also spend less on marketing in the region.
Bears point to DraftKings having a lower hold rate to Flutter's FanDuel and it is unclear how long it could take DraftKings to catch up, the analyst said.
"It appears FanDuel has a structural advantage."
DraftKings previously announced it would place a surcharge on winning bets in high-tax states before backtracking. The backtracking came from consumer feedback, DraftKings noted, but was also announced via social media hours after Flutter said it had no plans to impose a similar fee on bettors.
"DKNG management took a shot at fixing the major structural concern of the industry, it did not work, but it's water under the bridge and will be forgotten."
McTernan said the uncertainty of how the surcharge would play out for DraftKings is now gone.
The analyst said DraftKings bears see higher state taxes as a risk for the sports betting industry and DraftKings with Flutter marking a decision that will likely be followed by the industry. This could show Flutter is the leader and not DraftKings according to bears, the analyst added.
In the sports betting segment, DraftKings and Flutter have a technology moat, the analyst said, with operators competing on technology and product, not price.
"While there is a long tail of competitors, the OSB market is increasingly functioning as a duopoly and therefore competitive intensity remains low."
McTernan said the bear debate is Flutter is not going to ease on customer acquisition, which means DraftKings likely can't ease up either.
"As a result, it will be difficult for incremental margins to increase."
The analyst sees DraftKings' margins scaling thanks to its technology stack ownership and benefits of national marketing.
DKNG, FLUT Price Actions: On Monday at publication, DraftKings shares are down 0.61% to $33.93 versus a 52-week trading range of $25.74 to $49.57. Flutter shares are down 0.19% at $207.60 versus a 52-week trading range of $174.03-$226.40.
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