DraftKings could consider a stock buyback authorization as a way to return capital to shareholders given its strengthening balance sheet, according to Jeffrey Stantial of Stifel.
DraftKings VP of Investor Relations Joe DeCristofaro and Senior Director of Finance Mike DeLalio were present for investor meetings at the Stifel Cross Sector Insight Conference last week. Stantial rates DraftKings at buy with a $50 target.
The potential for capital return was one of three key takeaways by Stantial. He also views the recent Illinois sports betting tax increase as “fairly mitigable long-term” and notes resilient market share despite continued user acquisition spend by competitors including FanDuel.
DraftKings stock closed at $37.56 Wednesday, which is back above the $36.61 is closed at on May 28 after a 10.3% drop on the Illinois tax structure news.
DraftKings stock could grow without NJ increase
After the dip on the Illinois news, DraftKings shares could see growth if New Jersey fails to increase the online gaming tax rate to up to 30% as proposed, Stantial said.
Management noted that “key parties” understand higher taxes and other regulatory red tape can push gamblers offshore. The search for more tax revenue could lead to fresh talks for online casino expansion, management added.
As for Illinois, Stantial sees the impact as more near-term with DraftKings taking time to adjust its customer acquisition investment in the state. Management said the increase, which will likely see DraftKings and FanDuel paying some taxes at a 40% rate, should “prove mitigable long-term.”
Market share steady
Management noted that market share has not taken a hit year-to-date despite higher customer acquisition investment from five operators:
There has been growing concern with investors around this, given FanDuel parent Flutter‘s continued commentary that it will continue to invest in new customers as long as payback rates remain at two years or less.
Management also noted a difference in strategy: Flutter said FanDuel was going after casino-first customers while DraftKings casino base is primarily cross-sold from sports betting.
Stock buyback one option for DraftKings
Stantial thinks DraftKings upcoming capital allocation update will include some sort of capital return for three reasons. First, the company’s expected margin growth is at “little risk” given Missouri is the only state left that could potentially legalize this year, he said.
Also notable:
- Acquisition appetite limited to “small-to-modest” sized bolt-ons. Simplebet could be a target.
- Limited interest in international expansion.
- “Rapidly scaling” free cash flow with $377 million forecasted by Stantial in 2024 along with $1.2 billion in cash expected at year end.
“All-told, this suggests to us DraftKings’ forthcoming update will likely include return of capital, most likely in the form of a buyback authorization as management looks to retain flexibility while arguably also capitalizing on recent predominately tax hike related selling pressure,” Stantial said.
Jackpocket integration ‘encouraging’
Management said the early integration of Jackpocket, which closed May 23, is “encouraging.”
DraftKings should quickly expand the lottery courier product into new states, Stantial said. Cross-sell success will likely ramp up at the same time as integration and tech improvements, he added.
Stantial will update his DraftKings model ahead of second quarter earnings, which typically come out in the first week of August.
