Morgan Stanley Upgrades DraftKings (DKNG) to Overweight on Impressive Industry Trends

(Updated - January 20, 2021 7:50 AM EST)

Morgan Stanley analyst Thomas Allen upgraded DraftKings (NASDAQ: DKNG) to “Overweight” from “Equal-weight” after witnessing “impressive sports betting and iGaming trends” recently.

The analyst expects DKNG to report a beat on 2022-25 consensus by >25% while the near-term 4Q20 revenue is in line to beat the market expectations by about 10%. The new price target on DKNG is $60.00 per share, from the prior $39.00.

“We also expect DKNG to start to talk about profitability in NJ, as FanDuel did, countering the bear thesis that the industry will never be profitable. Bringing this all together, we expect Street 2025e EBITDA to rise from $434m today closer to our new $1B forecast (up from $761m),” Allen said in a note.

“With us still forecasting US sports betting revenue/adult at a discount to Australia/UK, potential for greater share concentration, and a few slower growth peers trading at >30x, further upside looks attainable with our bull case now $179.”

Overall, the US sports betting and iGaming revenues hit $3 billion in 2020 to easily top Morgan Stanley’s April 2020 forecast of $2 billion. Therefore, Allen now has upgraded 2025 forecasts to $10B/$5B vs. $8.5B/$3.5B previously for OSB and iGaming markets, respectively.

“While stay-at-home tailwinds likely helped, the strength in iGaming has extended well beyond the early casino closures, suggesting acquired customers will continue playing, and sports betting revenues beat our 4Q expectations despite a weaker sports calendar. We now forecast average US sports betting/iGaming spends per adult of $45/$104 in legalized states vs. our previous estimates of $38/$81.”

The analyst now expects 12 new states to legalize sports betting this year.

“While it's risky to predict legislative rollouts for Gaming-related causes, our extensive channel checks suggest that 2021 should stand out as an exceptionally strong year of legalization, driven by COVID-related budget deficits. We expect AZ, CT, KS, KY, LA, MA, MD, MO, OH, OK, SD, and TX to legalize sports betting in 2021, NY to legalize online sports betting, Ontario to legalize, and 2-3 states to legalize iGaming, setting up an attractive catalyst path for those exposed to the theme.”

Continuing with the industry-wide trends, Allen is still bullish on Macau stocks as he expects revenues to inflect in mid-2021, paving the way for 2022 sector EBITDA outperforming 2019 by 8% and consensus by 5%. In this space, Allen recommends Wynn Resorts (WYNN) as it is “the most exposed to the premium mass sweet spot of the industry.”

As far as other stocks are concerned, Allen outlines Boyd Gaming (NYSE: BYD) amid attractive valuation. The stock saw its price objective raised from $45.00 to $58.00.

“We expect meaningful pent-up demand and a strong economy to drive a good rebound in Vegas in 2H21/2022. Regionals should also benefit from the legalization of sports betting supporting growth for their onground business. However, broadly US regional/Vegas-exposed Gaming stocks re-rated meaningfully in 2020, and the Street has already reflected higher future margins from the zero-based budgeting exercise during the downturn.

“We have raised all our price targets for US Regional/Vegas-exposed stocks to reflect higher value from sports betting and slightly stronger 2022e EBITDA, which given high leverage results in much higher price targets; however, the stocks have already re-rated,” he adds.

The analyst also reiterated an “Overweight” rating on Gaming and Leisure Properties (NASDAQ: GLPI) and Vici Properties (NASDAQ: VICI).

For an analyst ratings summary and ratings history on DraftKings Inc. click here. For more ratings news on DraftKings Inc. click here.

Shares of DraftKings Inc. closed at $51.29 yesterday.

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