The company claims that investing in the operator is a “too large an opportunity to pass up.”
Morgan Stanley Research analysts upgraded DraftKings shares on Wednesday, citing the company’s position as a market leader in a hot industry.
Morgan Stanley claimed the early results from legalised gambling in New York state indicate the US sports betting/iGaming market is “likely to be very substantial,” but with only a handful of market share winners, in a research note labelled “too huge an opportunity to miss.”
“We see now as a good time to invest for the long term,” the firm stated, adding that with sentiment at an all-time low on near-term loss fears, “we see now as a good time to invest for the long term.”
Morgan Stanley increased DKNG to “Overweight,” citing the stock’s 75% discount to its 52-week high.”While we and the market have been focused on near- to medium-term profit worries,” the firm stated in its report, “we feel that at the current price, one should not overlook the fact that DKNG is a leading market share participant in what will be a very large profitable industry.” “At $19, the stock is trading at 9 times projected 2025e EBITDA; using 15 times to compare to other High Growth Internet stocks and reflect what we expect to be a double-digit EBITDA grower post-2025, we get to $31, implying a 60% potential.”
The report said that the results given by New York state on January 21 were a reminder of “how big and concentrated a potential US sports betting/iGaming is.” Morgan Stanley said the projected market revenue runrate is $1.9 billion, significantly above its previous forecasts of $600 million in 2022 and $1 billion in 2025, based on how successfully the first eight days of online sports betting went.
The storey goes on to say that Arizona was the final significant state to launch, and that annualised revenue is on track to be over $400 million, compared to Morgan Stanley’s pre-market launch prediction of $219 million for 2022.
Morgan Stanley stated the performance of sports betting highlighted how the main players “dominate” with only four operators live throughout the first eight days of the New York market. DraftKings, FanDuel, and Caesars Sportsbook combined for 98 percent of the handle and 99 percent of the GGR.
In Arizona, the top five operators currently have almost 95 percent of the market share in a market with nine operators.
High entry barriers
Morgan Stanley stated that the top five operators have at least an 82 percent combined market share in every state that publishes market share data. Even in Michigan, where there are 14 online sports betting companies, the top five control 90% of the market.
“Though there has been a lot of negative press about the levels of marketing and promotional spending, this has resulted in a highly concentrated market where only scale companies can truly compete,” the business noted. “The importance of technology, as well as the requirement to enter several states at the same time, adds to the benefits of scale.”
While there are fewer barriers to entry online than in person, “gambling in general is a profitable business,” according to the report. In the case of online, there are multiple public companies throughout the world with margins ranging from 15% to 40%, despite operating in highly competitive marketplaces.
While many states in the United States would not allow iGaming, Morgan Stanley referred to Australian companies that only offer sports betting yet have profit margins of more than 30%.
“DKNG has been able to better than the market rationalise promotional spending in PA while preserving market share,” MS stated. “According to our analysis of state-by-state marketing and profitability, DKNG’s losses should be smaller in 2023 than they were in 2022 (and 2021), which we feel might be a key positive catalyst for the stock (albeit it is still a year away).”
Bullish hopes are being fueled by the possibility of a California market.
According to the report, gambling industry observers are “increasingly optimistic” that California will legalise online sports betting this year.
“If it happens, our current market model says it may add $2 billion to our total addressable market forecasts, with New York suggesting even more upside.” Louisiana, Ohio, Maryland, and Nebraska are all set to open this year, which might provide more upside based on previous new market outperformance.”
In terms of bear risks, Morgan Stanley estimates EBITDA losses of $(883m) this year, which it says is greater than the $(883m) expected by others (550m).”Based on our client talks, the buy side appears to be considerably closer to us.” We further doubt that, unlike (OW-rated) Flutter, there will be any major incremental positive data points around profits in the foreseeable future. DKNG, according to our model, will need to raise money again before 2024, but it now has over $2 billion in cash, so it can wait. Legalization in California would be beneficial in the long run, but it would also push out near-term profitability and decrease the time frame for a capital raise. We expect new competition in the market from sports companies such as Fanatics and ESPN. Although DKNG’s technology is not as good as that of ENT or FLTR, we believe it is superior to others.We estimate a plausible bear case multiple of 3x 2023e revenue = $15 assuming revenue growth remains strong.”