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The DraftKings application on a smartphone.
Angus Mordant/Bloomberg
DraftKings
stock was falling on Wednesday after Major League Baseball canceled its Opening Day for the first time in 27 years. But any short-term losses could be a long-term opportunity, according to Morgan Stanley analyst Thomas Allen, who designated the stock a top pick.
DraftKings (ticker:
DKNG
), along with BetMGM, is an official betting partner of MLB. The league canceled the first two series for each of the 30 teams, erasing a total of 91 games, over a labor dispute Tuesday afternoon.
“We are not going to be able to play the first two series of regular season games and those games are officially canceled,” wrote MLB Commissioner Robert Manfred. “We are prepared to continue negotiations.”
The stock was down 2.6% to $22.91 on Wednesday.
“It’s certainly a hit to the business near term,” said Needham analyst Bernie McTernan. The reduced number of games means there’s fewer games for people to bet on, but he was upbeat about DraftKings’ ability to transition some of the baseball fans to engage with other products.
For Guggenheim Partners analyst Curry Baker, the MLB news is a near-term headwind. But while the games themselves are not all that material, the state of negotiations between management and the baseball players union could have wider repercussions and place the season itself at risk, he said.
“I think the real question is how long does this continue?” he added.
DraftKings shares have lost almost 20% this year, and are down 65% from their 12-month high.
For Morgan Stanley’s Allen, the current price point presents an appealing long-term opportunity — despite the considerable short-term losses.
“We believe the market is too short-sighted and our state-by-state profitability build suggests long-term profitability to be much larger than forecasted,” he wrote in a research note Wednesday.
Allen believes DraftKings could outperform on revenue in 2022, reinforcing the possible market expansion opportunity. Public international stocks have shown that sports betting is a profitable business, with profits of around 25% to 30%, he added.
He predicted that the U.S. legal sports betting market could increase to $20.6 billion in 2025 as legalization continues to spread and spend per capita increases.
McTernan and Baker also had Buy ratings on the stock, and were looking forward to DraftKings’ yearly investor day, taking place Thursday at 9 a.m. Eastern time. While Allen doesn’t expect the analyst day to be a major catalyst, Baker believes it could be as investors get to look under the hood of the company’s expansion. Management likely will focus on the company’s addressable market, margins, product differentiation, and customer retention, Baker said.
Not all analysts are that bullish on the stock. Earlier this year, various analysts slashed their targets on DraftKings in the face of potential headwinds it could face. DraftKings’ losses this past quarter were wider than expected, as the company grappled with higher expansion costs.
Of the 29 analysts covering the stock, 16 rated it a Buy or Overweight, and 13 rated it a Hold.
Write to Sabrina Escobar at [email protected]
