DraftKings Named Top Gaming Idea for Second Half by Stifel

Shares of DraftKings (NASDAQ: DKNG) closed lower by almost 1% today, but some sell-side analysts remain bullish on the stock despite a loss of 18.29% over the past 90 days.

DraftKings stock
A DraftKings billboard appears at Times Square in New York City. An analyst called the stock a top idea for the second half.(Image: NASDAQ)

In a note to clients today, Stifel analyst Jeffrey Stantial rated DraftKings a “buy’ with a $50 price target, implying upside of 34.8% from today’s closing price while noting the stock is a top pick for the second half of 2024. He pointed out that headwinds such as the recently implemented tax hike in Illinois are priced into the shares.

We see well-discussed headwinds to 2Q24/2024E Consensus (IL tax hike; Jackpocket drag) as de-risked following recent revisions, with healthy core growth drivers (evidenced by recent state reported GGR trends) posing potential upside to reset buyside expectations,” wrote the analyst.

Illinois approved a graduated tax rate on online sports betting operators, forcing the largest sportsbooks in the state to pay higher percentages. Under the plan, which into effect on July 1, Illinois now has the second-highest sports betting taxes in the country and the rate applied to big operators such as DraftKings and FanDuel parent Flutter Entertainment (NYSE: FLUT) likely more than doubled.

Focus on DraftKings Free Cash Flow, Says Stifel

Based on prior reporting patterns, it’s estimated that DraftKings will deliver second-quarter results on Aug. 1. One of the big issues analysts and investors will be monitoring is free cash flow.

The gaming company has been free cash flow negative, but has made significantly strides on that front over the past three quarters. Last year, the operator was free cash flow negative to the tune of $103.03 million, but that was a marked improvement from the -$721.95 million posted in 2022, according to Macrotrends data.

DraftKings is about four years removed from becoming a standalone publicly traded company, meaning it’s still a young firm. However, there’s increasing chatter among sell-side analysts that with free cash flow inflecting at the gaming company, return of capital to shareholders could be announced over the near term. Stantial sees that as a possibility.

“DKNG’s forthcoming capital allocation update (and likely initial return of capital) should also signal confidence in out-year FCF generation. All-told, we see a compelling setup heading into 2H24, and recommend investors own into DKNG’s Q2 print,” noted the Stifel analyst.

The analyst said a share buyback would likely be DraftKings’ preferred avenue of returning capital to investors and that the operator is unlikely to pursue large-scale mergers and acquisitions and international expansion over the near-term.

State Data Encouraging for DraftKings

While 2024 has been and will likely end to be a dud in terms of state-level expansion of online sports betting and iGaming, that factor is likely priced into sports betting equities. Specific to DraftKings, there is encouraging news in the form of rising market share in some states.

“We continue to see likely upside bias to DraftKings’ core value drivers — in particular user acquisition & monetization. Per state-reported data (see exhibits 1-6), U.S. same-state online sports betting handle growth accelerated to +24%/+29% year-over-year in April/May (vs. +17% Q1) with DKNG gaining market share sequentially in both months (though early June data suggests some reversion),” added Stantial.

The analyst also noted that many new DraftKings clients are likely casual bettors – a demographic prone to lottery-style wagering and thus higher holds for operators.

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Interview with Erik King on Ontario’s Second Year of Regulated iGaming

Great news for the online gambling business as the Ontario regulated iGaming market has processed $63 billion in bets in its second year, leaving Canadian platforms like the ones found on Zamsino thriving. To shed more light on this development and what it means in the industry we talked to Erik King, an iGaming specialist and a writer.

Interviewer: Erik, it is great to have you with us today. It is interesting to know that within its second year of operation, Ontario’s iGaming market processed wagers worth $63 billion. What do you think about this accomplishment at the beginning?

Erik King: I am grateful to be here. It is positive news for Ontario’s iGaming industry for sure. This achievement marks that the popularity of regulated web-based gambling is increasing. It reveals the possibility of a significant economic effect and serves as a reference point for other regions that are planning to implement the same legal mechanisms.

Interviewer: The iGaming market in Ontario that is regulated has expanded at a fast pace. In your opinion what are the causes of this tremendous growth you have experienced?

Erik King: Ontario has created a stable and reliable environment in the sphere of regulation which benefits both operators and players. This has boosted confidence in the market.

Interviewer: How has the regulation affected the market?

Erik King: Ontario has the best regulatory approach since the operators are required to follow certain guidelines that make sure that the player is protected, the gambling is not reckless and the gameplay is fair. This has in turn reduced the risks involved in online gambling and has gone a long way in protecting the players. In addition, the framework has brought order and predictability that is crucial in the market development. It has also been able to attract other companies, especially the international ones, which have come with better skills and products that have continued to enhance the competition.

Interviewer: This is a huge amount of money, the $63bn in wagers. This implies what for local economy and the iGaming sector as a whole?

Erik King: This figure generates a lot of revenue for the local economy in terms of taxes and fees. It also implies employment in different fields like tech support, software development, and sales and marketing. For the iGaming industry, it shows that the market is healthy and growing, which could encourage other areas to consider regulation. It is proof that regulated online gambling markets are viable and profitable.

Interviewer: Owing to such growth, what do you think could be the potential problems with Ontario’s iGaming industry?

Erik King: The biggest issue will be the control of growth while at the same time ensuring the aspect of responsible gambling. In the future when the market grows, it will focus on how operators address issues associated with problem gambling. Other issues that will likely persist include managing changes in technology and the threats posed by criminals to the company’s systems.

Interviewer: What do you suppose the other regions will do when they see the positive results in Ontario? Are you expecting other regions to follow the same approach in regulation?

Erik King: It will be expected that the experience of Ontario will be followed by other areas.

Interviewer: What do you think are the major strategies that operators should consider to survive the competition in such a market?

Erik King: Thus, to be successful, operators should concentrate on the following strategies. First and foremost, they should focus on customer satisfaction by providing quality, entertaining, and diverse game selections. Through the integration of technologies such as artificial intelligence and machine learning customer experience in gaming can be improved and enhanced.

Interviewer: Last but not least, what do you think will be the future tendencies in the iGaming industry, especially in the regulated ones like Ontario?

Erik King: I expect the following to be quite promising and interesting. First of all, the use of advanced technologies like the blockchain and virtual reality will change the face of the gaming industry and make the gaming experience even better and more secure. Mobile gaming will continue to expand as a result of improvements in mobile devices and their accessibility.

Interviewer: It was an interesting time here today, Erik, thank you for the input. I hope that you enjoyed our conversation on the subject of the iGaming market development and trends.

Erik King: It was nice of you to have me. It is great to be here during the growth of the iGaming sector and I am eager to find out what the future has in store.

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