On Tuesday, Needham maintained a Buy rating on DraftKings Inc. (NASDAQ:DKNG) with a steady price target of $60.00. The firm addressed recent legislative developments in Illinois, where the state senate passed a bill on Sunday that is likely to result in increased tax rates for online sports betting (OSB) operators starting July 1st.
The proposed tax changes have been anticipated by investors, as reflected by DraftKings' stock performance, which has seen a 12% decline since May 15th, in contrast to the S&P 500's stability over the same timeframe.
The analyst from Needham noted that the new progressive tax proposal in Illinois aligns roughly with the governor's previous suggestion of a 35% flat rate from February. The progressive structure is expected to be more favorable for smaller operators like RSI and PENN, which are also rated Buy with price targets of $10 and $26 respectively.
These smaller operators would face lower tax rates than DraftKings due to their current market shares. For RSI, the impact of the higher taxes could be mitigated by their revenue share agreements, which are calculated after taxes.
The long-term implications of increased tax rates are a growing concern for investors, according to Needham. The firm anticipates that the debate will pivot towards the potential for operators to balance out higher taxes with reduced customer acquisition spending. For DraftKings, the higher taxes in Illinois are expected to exert pressure on the company's adjusted EBITDA guidance for 2024, though the impact might be less severe than initially estimated. The incremental tax payments are projected to be approximately $44 million.
By 2026, Needham forecasts that DraftKings' financial estimates could range from flat to positive when considering the combined effects of the higher Illinois tax and the recent acquisition of Jackpocket, which was finalized last week. These factors have not been included in the base-case model.
For RSI and PENN, the progressive tax rate means they would pay a lower rate than DraftKings, given their current market shares. Additionally, RSI's revenue share model based on after-tax revenue could further lessen the tax impact.
InvestingPro Insights
With the focus on DraftKings Inc. (NASDAQ:DKNG) amidst legislative changes and market reactions, insights from InvestingPro can provide a clearer picture of the company's financial health and future prospects. According to InvestingPro Data, DraftKings boasts a significant market capitalization of $19.74 billion, signaling strong investor confidence. The company has experienced a remarkable revenue growth of 57.0% over the last twelve months as of Q1 2024, underlining its expanding market presence. Despite not being profitable over the last year, analysts are optimistic, predicting profitability for the company this year, an InvestingPro Tip that aligns with the positive outlook shared by Needham.
Investors might also be interested in the company's stock price performance, which has been notably volatile but has delivered a high return of 74.55% over the past year. This could be particularly relevant for those looking to capitalize on market fluctuations. DraftKings operates with a moderate level of debt, which is an important consideration for risk assessment. For readers seeking to delve deeper into the financial metrics and strategic analysis of DraftKings, there are 12 additional InvestingPro Tips available, which can be accessed by visiting https://www.investing.com/pro/DKNG. To enhance your investment research, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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